The Dutch pension system is nearly 100% funded, covers the majority of citizens, and is regularly ranked as one of the world’s greatest pension systems.
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When they retire, the average Dutch worker will receive around 70% of their income each year during retirement.
What’s more, the entire country is practically covered: Over 90% of Dutch workers will get these pensions – regardless of their profession – as each industry creates its own non-profit fund for workers.
Each fund follows the same pattern: Roughly 10% of each individual’s pay packet is automatically diverted into their pension. This is swelled by a small contribution from their employers, and total amount – taken from many thousands of people invested in the same fund – builds up the pot for investment.
Central Bank of the Netherlands Director Olaf Sleijpen says this approach – of technically forcing people to save for retirement – is backed up by research on how people make financial decisions, and cites it as “the success factor of the Dutch pension system.”
A growing population; a growing deficit
Yet there is a worrying trend. Much like in the USA and other developed countries, the population in the Netherlands is growing older; meaning the retirement age is rising.
This means more payments are coming out, and for longer periods of time.
Exasperating this is the fact there are fewer young workers, meaning less money is being contributed.
This imbalance is only expected to grow.
What’s more, as most of the funds are invested, they took a huge hit during the global financial crisis, and in the spring of 2013 the funds took an unexpected step – with 66 of the country’s 415 funds announcing pension income cuts.
Some of the cuts were modest, totalling just 0.5%; but others were up to 7%, making a dramatic difference in the quality of life for many workers.
The cuts are due to the regulations surrounding pensions in The Netherlands; as pension funds have to hold a minimum of 105% of all their liabilities.
If a fund drops below that level, pension managers have the authority to make workers pay more, or give out less to retirees – a collective sharing of risk which is another hallmark of the system and aims to make Dutch funds stronger than its contemporaries during economic crises.
Yet in October, new figures from DNB stated that the continued volatility in financial markets meant the coverage ratios of 207 out of the 468 Dutch schemes are currently too low.
One of the more worrying schemes is the EUR 25 million PME fund for the metal industry, which, with its low coverage ratio of 88%, is considering both increasing contributions and announcing a benefits cut.
This is only one of a wave of dramatic cuts expected to be announced next year.
So whilst the Dutch system is no doubt resilient, economic hardships and changing demographics is putting a large strain on pension funds across the country.
So now the question is: To keep the system going, who exactly has to adjust?
Many in The Netherlands worry that ultimately, the younger generation will have to shoulder the current burdens by paying more in – and ultimately receiving less in the future.
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