The Dutch pension system: till 2011 the best in the world! Léon Zijlmans AAG. Third African Actuarial Congress

Transcription

1 The Dutch pension system: till 2011 the best in the world! Léon Zijlmans AAG Third African Actuarial Congress Lomé (Togo), April 24-26, 2013

2 Agenda The Netherlands? Dutch pension provision: 3 pillars Focus on pension funds Future of Dutch pension provisions

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4 The Netherlands Some facts: 37,354 km 2 of which 18% water 16.8M inhabitants (= aver. 549 inh./km 2 ground) Approx. 950 qualified actuaries 112 registered as special qualified to certifying

5 The Netherlands

6 Dutch Pension Provision World Bank 1994: 3 pillars recommended (1) Mandatory publicly managed, tax-financed public pension (since 1957) (2) Mandatory private managed, fully funded benefits (since 1836) (3) Voluntary privately managed, fully funded personal savings (since 1882)

7 Mercer Global Pension Index Ranking Country Overall Index Value Sub-index Values 2012 Adequacy Sustainability Integrity (2011) (40%) (35%) (25%) 1 (-) Denmark - 82,9 78,1 86,0 86,4 2 (1) Netherlands 77,9 78,9 77,0 73,0 90,3 3 (2) Australia 75,0 75,7 73,5 73,0 83,2 4 (3) Sweden 73,4 73,4 68,0 73,3 82,5 5 (4) Switzerland 72,7 73,3 71,3 67,9 84,1 6 (5) Canada 69,1 69,2 74,2 56,3 79,3 7 (6) UK 66,0 64,8 68,1 46,5 85,0 8 (7) Chile 64,9 63,3 50,1 67,7 78,4 9 (10) USA 58,1 59,0 58,3 58,4 61,1 10 (8) Poland 58,6 58,2 63,6 43,4 70,1 11 (9) Brazil 58,4 56,7 71,5 26,9 74,8 12 (13) Germany 54,2 55,3 65,2 35,9 66,7 13 (11) Singapore 56,7 54,8 42,0 54,2 76,2 14 (12) France 54,4 54,7 74,3 32,0 55,2 15 (16) China 42,5 45,4 55,7 30,5 49,7 16 (-) Korea (South) - 44,7 45,1 42,3 47,5 17 (14) Japan 43,9 44,4 46,1 28,9 63,3 18 (15) India 43,4 42,4 37,4 40,7 52,8 average 60,6 61,0 62,2 52,1 71,5

8 The Dutch 3 pillars Pillar 3 Salary Pillar 2 Pillar 1 Working life Retirement

9 Pillar 1 = State old age pension Dutch: AOW Retirement age (P): : 65 yrs : 65 ->> 67 yrs : 68? Based on life expectancy (=L) Δ ret.age = (L 18.26) (P 65) = average life expect. of 65 year old in period

10 AOW (2) Accrual in 50 yrs < retirement age Level state Old Age pension (gross): Married/cohabiting: EUR 800 /person/month Single: EUR 1153 /person/month Base of AOW = minimum wage: Net AOW = 50/70% Net minimum wage Living abroad: no accrual Voluntary accrual: max premium

11 AOW (3) Tax-financed: Pay as you go 17.9% of salary < EUR 34K Future problems: More retirees, less actives Increasing life expectancy

12 Government Pillar 2: the parties involved Pension fund / insur. comp. Service Agreement Pension rules Legislation Employer E ee contribution Pension Agreement Employee

13 Pillar 2: pension Pension = employment condition Pension agreement = part of the labor agreement Not a real mandatory: Only if agreed in a Collective Labor Agreement Fully funded: Outside the company! Pension fund Insurance company

14 Pillar 2: legislation Social legislation: Equality (M/F, married/single, young/old) Fiscal legislation: Max. accrual (DB) or max. premium (DC) EET-system: Contributions by employer and employee are exempted from tax, The funded pension (liability) is exempted from tax, The pension payment is taxed.

15 Pillar 2 vs pillar 1: Pensionable salary Pillar 3 Pillar 2 Pension offset Pillar 1 Working life Retirement

16 Fiscal limits Pension offset: Minimum offset Related to AOW: 10/7 x AOW married person 2013: EUR 13,227 Salary offset = pensionable salary: The sky is the limit

17 Fiscal limits Max. annual accrual of pens. salary: Final pay: 2% (2014: 1.9% -> 1.5%?) Average pay: 2.25% (2014: 2.15% -> 1.75%?) Max premium = actuarial premium Defined contribution plans: Age related tables: premium as % of pensionable salary: 4% (age < 20) 32% (age > 64) Premium based on average pay plan: Derived from max. table

18 Pension schemes DB-Final Pay DB-Average Pay DB-Fixed Amount DB-else DC DB/DC else

19 Pension performers Pension promise outside own company: Industry wide pension funds: ABP (civil servants), PFZW (nursing), etc.: approx. 80 Company pension funds: Shell, Philips, etc.: approx. 350 Profession pension funds : Doctors, dentists, etc.: 12 Insurance companies (mostly for smaller pension schemes): number = unknown Premium Pension Institute (PPI; since 2011): 10

20 Pension assets / liabilities Estimated Total Pension Balance Sheet 2012 (x EUR 1,000,000,000) Total assets 1,200 Total Equity 100 Total pension liabilities 1,100 Balance total 1,200 Balance total 1,200 Cover ratio (assets / liabilities): Pension funds: % (average approx. 106%) Insurance companies: 101%

21 Dutch pillar 3 Voluntary personal savings Individual annuities: Insurance companies Banks No pension funds!

22 Pillar 3: fiscal Fiscal limits: Only in case of pension shortness = 2nd pillar < fiscal max. accrual Taxes: EET-system (like pillar 2)

23 Alternative Non-annuities: Savings Investments Taxes: TTE-system Also for non-approved pension schemes pillar 2!

24 Focus on pension funds Board of: E ers representatives E ees representatives (incl. deferred + retirees) Industry wide PF: # E er = # E ee (50/50) Company PF: # E er # E ee Governance: Expertise (education!) Internal (Board of employees + retirees) External (Dutch Supervisory Body)

25 Required premium PF Premium for conditional indexation Administration fee Solvency Actuarial premium for 1 year pension accrual Total premium

26 Requirements (equity) Minimum required equity: Approx. 5%, depends on: Ratio of reinsurance of gross liabilities Ratio of reinsurance risk capitals (death) Premiums for disability pensions Guaranteed full reinsurance: 1%

27 Requirements (solvency) % chance cover ratio not below 100% next year. Required equity: Approx. 7-25% of liabilities, depends on: S 1 : Yield risk to liability: 25% decrease of yield curve S 2 : Investment risks: S 2A : Mature market equities: - 25% S 2B : Emerging markets: -35% S 2C : Non listed equities: -30% S 2D : Real estate: -15% S 3 : Non-EUR currency risk: Decrease of 20%

28 Requirements (solvency) 2 Required equity (continued): S 4 : Commodities: Value decrease of 30% S 5 : Credit spread: Fixed 40% S 6 : Technical risks: TSO = trend in death development NSA = negative stochastic deviation S 7 : Cash risk (temp. 0% allowed) S 8 : Concentration risk (temp. 0% allowed) S 9 : Operational risk (temp. 0% allowed)

29 Solvency; standard model (S S x0,50xS 1 *S 2 + S S S S S S S 92 ) With: S 2 = (S 2A 2 + S 2B 2 + S 2C 2 + S 2D 2 + 2x0,75x (S 2A xs 2B + S 2A xs 2C + S 2A xs 2D + S 2B xs 2C + S 2B xs 2D + S 2C xs 2D )) We actuaries really love this!

30 How to calculate the liabilities? Since new pension legislation 2007 Present value of all accrued pensions Prognosis table: Expected death rates for next 50 years ( ) Adjusted (lowered) for specific industries Market value: Interest yield for zero-coupon fixed incomes Ultimate Forward Rate: 4.2% (last liquid point = 20 yrs.)

31 Interest yield + UFR 4,5 4,0 3,5 3,0 2,5 2,0 1,5 1,0 0,5 0,

32 Cover ratio Equity < minimum required equity: Recovery program in 3 years Increase premium No indexation No higher investment risks Decrease accrued pensions (also in payment!) Equity < required equity: Recovery program in 15 years Same instruments as above

33 Pension decrease Only at pension funds In 2013: 68 pension funds Max. 7% decrease If necessary remaining decrease in 2014

34 How to save Dutch pensions? Many discussions Several governmental commissions Increase the retirement age more rapidly Better communication: Pensions were never fully guaranteed but the employees didn t know! 3 pillar ->> 5 pillar system: World Bank 2005 (Holzmann and Hinz)

35 How to become no. 1! (According tot Mercer): Minimum access age: already 21! Raising level of household savings More older workers More protection in case of: Fraud: pension funds governance Mismanagement: internal + external supervisory Employer insolvency: higher premium!

36 Thank you for your attention!