Occupational pension issues place increasing pressure on industrial relations

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Developments in recent years have challenged the Dutch occupational pensions system. Employers and employees are being confronted by rising contributions, eating into the scope for pay increases and placing pressure on collective bargaining. At the same time the absolute power of the social partners in running pension funds is being challenged by pensioners, causing an increasing number of disputes. This article reviews the situation in autumn 2004.

The Dutch pensions system (alongside the Danish model) is often cited as an example in an international context. An important characteristic of the Dutch system is seen to be its highly developed 'second pillar' of occupational pensions, which covers around 90% of the workforce (TN0404101S). However, developments in recent years have shown that the Dutch system is not entirely shock-proof. Partly because a large share of the pension funds’ resources are invested in the stock market, they are now suffering from a shortfall because of dramatically reduced share prices (NL0108142F). This article analyses how this situation has arisen, along with the measures taken to make up the shortfall and the consequences of this for industrial relations (NL9812111F and NL9808194F). It also addresses the growing number of conflicts arising between current employees and pensioners, and measures to increase the degree of participation among the latter group.

Rising employer and employee contributions

The depletion of pension fund reserves will have significant consequences, including a massive increase in both employer and employee contributions. Figures published by the Central Statistical Office (Centraal Bureau voor de Statistiek, CBS) show that social contributions by employers rose by EUR 7.5 billion in 2003. The bulk of this amount (EUR 5.6 billion) is accounted by employers’ share of occupational pension contributions. The increased burden comes mainly as a result of stricter requirements imposed on pension funds by the Pension and Insurance Supervisory Board (Pensioen- en Verzekeringskamer, PVK) (NL0210102F). A further EUR 70 billion will have to be set aside in the coming years in order to comply with the new requirements. The extent of the consequences is clearly illustrated in the following examples.

The Unilever food and chemicals group, which had for some time had withdrawn money (more than EUR 1 billion between 1991 and 2001) from its pension fund as opposed to paying in, has now changed tack. In 2002 Philips (electronics) still received money from its pension fund, but the tide turned in 2003 and the company expects to be confronted with a pension burden of EUR 200 million to EUR 250 million for 2004. In 2004, the employers’ pension burden carried by Corus (steel) rose by 30% and at Akzo (chemicals) this figure increased by roughly a third. A working group, including trade union representatives, has calculated that pension expenditure at ING (finance) will rise from 8% of the total paybill in 2004 to 38% in 2008.

Contributions rose by an average figure of 17% in the 80-plus sector-wide pension funds in 2003. However, this figure masks major differences. For example, contributions rose by more than 64% in the optics sector fund and by more than 25% at the PGGM social service and welfare sector fund, the second largest in the Netherlands.

As well as employers, employees are also having to contend with the consequences of the dwindling financial position of the pension funds. Non-contributory pensions will be coming to an end for employees at a number of companies including ING and ABN-Amro (finance), despite resistance from the De Unie trade union. Other finance companies such as Achmea, Rabo, and Fortis already introduced an employee contribution in 2003. A total of 16 sector-wide pension funds - with an overall membership of 1.3 million employees - will be compelled to raise employees' contributions in the years ahead in order to cover costs.

The only exception will be the fund for 185,000 hospital employees. In April 2004, agreement was reached during the collective bargaining round that the employees would henceforth cover 52% of the pension contribution and employers 48%. The ratio had previously been 55% and 45% respectively. The customary division in the Netherlands is two-thirds for the employer and one third for the employee. An important reason for agreeing on a different division in the hospitals sector was that the autumn 2003 'social agreement' between government and the social partners still applied during the negotiations (NL0403103F). Since this agreement included a wage freeze, increasing the employer's pension contribution was used as an alternative to a wage increase.

Supervisor imposes less stringent requirements

Lower share prices have also pushed many pension funds below the 'minimum cover ratio', and they will need to top up their reserves in the coming years. In March 2004, the PVK announced that the stringent requirements imposed on pension funds to this end in 2002 (NL0210102F) would be relaxed somewhat. From now on, pension funds will be required to maintain reserves capable of sustaining a 25% drop in share prices. This level had previously been set at 40%. The intention is for pension funds to have a cover ratio of 130% in time. They will be allowed a period of 15 years to achieve this.

For the most part, the pension funds responded positively to this relaxation, as did the trade union movement and employers' organisations. The amendment was supported by an agreement between the State Secretary of Social Affairs and Employment, Mark Rutte, and the social partners represented on the Labour Foundation (Stichting van de Arbeid, STAR) on the one hand and the Council for Civil Service Staff Policy (Raad voor het Overheidspersoneelsbeleid) on the other.

The Lower House of parliament also declared its support for the new supervisory regime in March 2004. An important part of the new system is that pension funds that clearly indicate that participants do not enjoy rights to indexation of their pensions, are not required to set aside a reserve for this purpose. However, there are some criticisms too. In April 2004, the second largest pension fund, PGGM, criticised the period of one year within which pension funds must achieve a cover ratio of 105%. For PGGM, this meant having to double contributions. For 2005, PGGM had already announced a contribution increase from 13% to 15.5% of pay. In 2006, the contribution will increase further to 17.5%.

Long-term risks

Problems concerning the Dutch collective occupational pension system are largely attributed to the dramatic fall in share prices. However, aside from fluctuating share prices, interest rate changes and the rate of inflation can also lead to unpleasant surprises for pension funds.

Traditionally, pension funds are allowed to calculate what the value of future obligations will be based on an assumed interest rate, which has for some time been set at a maximum of 4%. In future, such calculations will have to be based on the current market rate. The consequences of interest rate falls are particularly great. A drop of one percentage point leads to an increase in pension obligations of 16% to 17%. An interest rate drop of even one percentage point would, for example, cost the Netherlands’ largest (civil service) pension fund, Algemeen Burgerlijk Pensioenfonds (ABP), approximately EUR 22 billion. By way of comparison, the decrease in share prices in 2001 and 2002 cost ABP EUR 27 billion.

Adjusting pensions in line with inflation has also cost pension funds an enormous amount. The Dutch capital funding system for occupational pensions is more sensitive to inflation than other systems based on 'pay-as-you-go' financing. Partly because of scarcity in the labour market and a VAT increase in 2001, inflation was relatively high in the Netherlands in the 1998-2003 period. Since 1998, the obligations of the pension funds have risen by around EUR 40 billion as a consequence of indexation. For example, PGGM indexed its pensions by 5.9% in 2001.

The initial effects of inflation now appear to have subsided. First, inflation has dropped considerably. Second, the difficulties mainly arise with respect to the last-earned wage system for calculating pensions as opposed to the average wage system. In recent years, pension funds have increasingly switched over to the average wage system.

Increasing dissatisfaction among pensioners

Driven by their shortfalls, many pension funds have been prompted to withdraw or at least lower the level of pension indexation. For the time being, this has only affected company pension funds; in 2004, most sectoral pension funds have adjusted pension benefits in line with the inflation rate. Previously, failure to index fully or at all led to conflict at Kemira (chemicals) (NL0108142F) and Esso (petrochemicals), and in 2004 the number of conflicts over this issue appears to be rising.

Shell

Participants in two pension funds in the USA lodged a class action against Shell (petrochemicals) in April 2004. The group of employees concerned had a pension scheme based on the value of Shell’s shares. The share price fell significantly during the first half-year of 2004 following news that Shell had been systematically reporting overly high oil reserves.

Campina

In March 2004, retired employees of Campina (food) threatened to take legal action if a reduction imposed on their pension benefits was not lifted. In 2003, the trade unions and company had agreed on an annual reduction of 1.2% over a five-year period. The pensioners were not consulted about this decision. In its initial response to the complaint, the company refused to adjust the agreement.

On 16 April 2004, the Arnhem subdistrict court ruled in favour of the pensioners. The court deemed that the company had put forward insufficient evidence of having too little money in reserve to be able to effect a policy of full indexation. The chair of the pension fund had argued that there was a shortfall of EUR 98 million. Moreover, the company is having to contend with a cover ratio of 109%, considerably lower than the desired level of 125%. Based on the outcome, pensioners received 1.9% more in 2004 than they had in 2003. The company lodged an appeal against the ruling on 22 April 2004.

The conflict escalated further in June 2004. Employees at the company announced their intention to stop paying pension contributions altogether if the pensioners refused to agree to a reduction in the level of indexation.

Coberco

Also in March 2004, the De Unie union at Friesland Coberco (dairy products) threatened to take the company to court because it had insufficiently indexed the pensions of former employees. This concerned some 16,000 pensioners who claimed that they had received a total of between EUR 25 million and EUR 50 million too little in benefits over a three-year period. Based on the applicable collective agreement for the dairy sector, the company was obliged to raise pensions in line with the inflation rate. However, this was not the case, and the adjustments remained lower than the rate of inflation.

Océ

Pensioners who previously worked at Océ van der Grinten (copying machines) approached the courts to demand complete correction of their pensions in line with inflation. However, their demands were refused by the court at Roermond on 16 June 2004. As a result of inadequate cover for future pension obligations, the court granted the company fund permission to withdraw indexation.

ECN

At the beginning of September 2004, members of the pensioners’ association at the ECN energy research centre went to court demanding indexation of their pensions. ECN, which has transferred its pension scheme to an insurance company, claims to have insufficient funds for indexation. Additionally, two employees at ECN, represented by the AbvaKabo civil servants union, have since initiated separate proceedings against ECN’s policy of not applying indexation.

Pensioner participation

For several years, pensioners have been complaining that they have insufficient say within pension funds. The power rests with the fund administration or management body, comprising an equal share of employer and employee representatives. While it is true that there is an option to reserve seats for pensioners and/or to establish a membership board representing pensioners, pensioners' representatives claim that this provides insufficient guarantees that their interests will be properly protected.

On 1 July 2004, Aart Jan de Geus, the Minister of Social Affairs and Employment, argued forcefully for a code of good conduct for pension funds, comparable to the 'Tabaksblat' code for listed companies (NL0405101N). The Minister has a dual objective: first, an improvement in the quality of management; and, second, a stronger position for pensioners. If funds fail to take suitable measures, the minister has threatened to revoke tax allowances and possibly end compulsory participation in schemes.

A working group established by the Ministry of Social Affairs and Employment has recommended that consultative bodies be introduced involving employers/employees and pensioners. The management of pension funds would have to request approval each year from this body for the policy pursued. In broad terms, this body would assume the same role as a supervisory board in the business sector. Furthermore, the influence of collective bargaining negotiators should be limited; they should at most form a minority in the pension fund's management. Further, company chief executives should be barred from serving as chairs of the (company) pension fund management body. The Association of Company Pension Funds (Vereniging van Ondernemingspensioenfondsen, Opf), which has a membership of some 370 pension funds, responded critically to the proposals, calling for more openness while maintaining the current structure. Opf published a number of guidelines to this end in April 2004.

The Association of Sector-Wide Pension Funds (Vereniging van Bedrijfstakpensioenfondsen, VB) published its own code of good management in June 2004. In the code, VB calls for the establishment of a board consisting of employers, employees, pensioners and participants. The Confederation of Netherlands Industry and Employers (Vereniging van Nederlandse Ondernemingen-Nederlands Christelijk Werkgeversverbond, VNO-NCW), the main employers’ confederation, responded critically to the VB proposals, arguing that a board consisting of all interested parties would be awarded undue powers and have too much sway over the current management structure, within which employers and employees determine policy.

A third type of 'directly insured' scheme, whereby a company transfers its pension scheme to an insurance company, exists over and above the sector-wide and company pension funds. In its current form, in contrast to the rules on sector-wide and company pension funds, the Pension and Savings Funds Guarantee Act (Pensioen- en Spaarfondsenwet, PSW) does not contain provisions on pensioner participation in directly insured schemes. Despite the fact that the social partners and organisations representing older people reached agreement on pensioner participation in pension scheme in 1998 and 2003, it appears this has little effect in practice with respect to directly insured schemes. On 16 June 2004, the Minister of Social Affairs and Employment announced that there is a need for measures in this area, which will be regulated in a forthcoming Pension Act (Pensioenwet).

Commentary

Although the collective occupational pension system in the Netherlands is often presented as an example in the European context, cracks are beginning to appear. While external causes (especially the drop in share prices in 2001 and 2002) are of great importance, the social partners themselves are also responsible for the current problems because they set the contribution levels too low in the preceding years. These low contributions - in some cases culminating in exemptions from paying contributions for employers and employees, or even in employer pay-outs from the pension funds - often served to lubricate collective bargaining or diminish the level of hardship during reorganisations. These days are over. Since then, the impact of pensions on industrial relations has grown. Employees and employers are facing higher contributions, which gobble up an increasing share of the already diminished leeway for wage increases and place additional pressure on collective bargaining.

The apparently contrasting interests of the active workforce versus the ranks of the retired is becoming a more topical issue. The abovementioned case of Campina is perhaps the most extreme example in this regard. More than before, pensioners are making their voice heard and have succeeded in reinforcing their institutional position. It nonetheless remains to be seen if they will achieve success in material terms too. They demand that pensions should be fully indexed. Although they have been successful in some cases, it does not appear that they will achieve this objective in the long term. The problems facing the pension funds are too serious for this to be feasible. Moreover, the active workforce will not be prepared to pick up the tab in full. After all, they are already having to deal with quite a few surprises: rising contributions, having to continue working for longer, and a pension system based on average earnings as opposed to the last-earned salary. (Robbert van het Kaar, HSI)

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