Dutch pension funds make a profit on their investments almost every month. Never before had they saved up so much money: around 1,500 billion euros. The pension pots are fuller than ever. But as long as interest rates continue to fall, the funds can continue to invest.
That is because the obligations of the pension funds – the money that they need to have in cash – is growing faster. This is all because of the interest rate. Now that this is so low, funds must assume that their money will only slowly increase in value. So, they must already have a lot of money in reserve to be able to guarantee future payments.
According to Bas Jacobs, Sijbren Cnossen Professor of Public Economics at Erasmus School of Economics, a lower future pension payment is a way to improve the funding ratio of the funds. ‘At the same time, the government can increase the state pension for all elderly as a compensation. Then you will have reduced the proportion of the capital covered and increased the proportion of the pay-as-you-go part of the pension.’
Reducing the capital base would be a risk when the interest rate rises again on the long run, because increasing it again later in time is a lot more difficult. ‘However, a mistake can be made to intervene too late if the interest rate remains low for a long time,’ says Jacobs. ‘Maybe this will take much longer than we think. The we will be kicking ourselves for not changing it sooner.’
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Read the entire article on NRC.nl, 20 September 2019 (in Dutch).