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Monday, May 27, 2013 12:57 PM

Dutch Defined Benefit Pension Plans, Second Largest in Europe, Face Forced Cuts

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Things are getting rather interesting in the Netherlands as low interest rates have increased pension deficit liabilities. Unlike the US and other parts of Europe where deficits are ignored, Dutch law requires 105% funding and the plans fell from 152% funded in 2007 to 102% funded today.

This has forced pension plans to cut benefits by as much as 7% for some trades. As might be expected, this has given rise to a 50 Plus Party, which won election to the Dutch parliament for the first time last year on promises to defend the interests of pensioners.

Please consider Yawning deficits force Dutch pension funds to cut payouts.

A combination of record low rates, sluggish economic growth and lives that last far longer than anyone imagined even a decade ago have resulted in yawning deficits. At the end of 2012, the funds were €30bn short of what is needed to cover promised benefits.

For the Dutch, the cutbacks are the first ever in a nation which has the second largest “defined benefit” system in Europe. But defined benefit provision, under which pensioners are guaranteed a portion of their salary for as long as they live, is unraveling under the pressure of the financial crisis and ensuing recession.

In April, under orders from the Dutch central bank, 66 of the country’s 415 pension funds started cutting their payouts. The average cut is around 2 per cent of the monthly benefit, but that figure conceals a wide range.

Last September the parliament, under pressure from older voters, approved new rules that allow pension schemes to use a higher rate to gauge the pace at which inflation will erode liabilities.

This has lowered liabilities, and funding targets. The sector as a whole now has a coverage ratio of 105 per cent under the new rules, but just 101 per cent under the old rules, according to an analysis by Aon Hewitt.

As at 2007, a quarter of Dutch retirees were below the age of 60. Early retirement has proved extremely expensive for defined benefit schemes, especially as longevity has risen sharply. On average, Dutch men aged 65 can expect to live for another 18 years as of 2011, up from just 15.5 years a decade earlier.
Head in the Sand Solution

Burying your head in the sand is not a solution to the problem but that is exactly what the Dutch parliament did by assuming higher rates of inflation (and interest on bonds) in a low-yield world. 

This is yet another consequence of central bank policy to drive down interest rates. When the US stock market heads south again (and it will), US pension plans, already trillions of dollars underfunded, will become even more underfunded.

Mike "Mish" Shedlock

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