After a favorable 2021 pension increase is in sight

Shall we increase pensions? It has been a long time since that question was on the board of large fund funds. For years this was not an option because the funds were in too bad a position, according to the legal rules.

Now the drivers can think about it carefully. On Thursday, the four largest pension funds released rosy figures for 2021. They benefited from a good investment year, with returns from 3 percent (metal fund PME) to no less than 11 percent (ABP, for education and government personnel).

Equity returns, among other things, were high: more than 20 percent. The rise in interest rates also helped the funds. This is due to the calculation rules: with a higher interest rate, funds need to hoard less money to secure future pension benefits. If the interest rate rises, their financial situation – expressed in the ‘funding ratio’ – immediately becomes rosier.

The two largest funds, ABP and PFZW (healthcare and welfare), in particular benefited from this. A year ago, their funding ratio was still around 93 percent. This means that they had about 7 percent too little capital to meet their future obligations. Now ABP stands at 110.2 percent, and PFZW at 106.6 percent.

Their position thus improved more than that of the two metal funds PMT (from 96 to 106 percent) and PME (from 97 to 108 percent). This is because ABP and PFZW take a relatively large amount of investment risk: if interest rates fall, their funding ratio drops sharply. But in favorable years, such as 2021, they benefit the most.

Two big uncertainties

These favorable figures finally bring an increase in supplementary pensions in sight, after those twelve years have virtually stood still. The chairmen of the large funds therefore hope that it will be successful this year, they emphasize in their press releases. Especially now, as PFZW chair Joanne Kellerman writes, “groceries are becoming more expensive and energy prices are rising rapidly”.

What helps: the cabinet is working on relaxed rules, which will allow pension funds to distribute a pension increase more quickly. Now pension funds can only make a small inflation correction if their funding ratio over the past twelve months has averaged 110 percent. That will be 105 percent. That lower limit will then apply until the major pension system review, which funds expect to implement around 2026.

Also read: Increasing the AOW is not as simple as it seems

However, there are still two major uncertainties that could stand in the way of a pension increase.

There are doubts in the pension sector about the relaxed rules proposed by the cabinet. Are they really that flexible? For example, the government requires extensive substantiation of funds that rely on the more lenient increase rules. They must explain why their intended inflation adjustment is in the interest of pensioners and employees.

That is an unrealistically high requirement, according to the Pension Federation, the umbrella organization of pension funds. In a response to the cabinet proposal, the organization explains that a faster pension increase “evidently” favors retirees and older employees in particular. It is therefore impracticable for funds to argue that all employees benefit from this.

TKP, an executive organization for pension funds, has the same criticism, in response to the cabinet plan. The substantiation requirements of the cabinet are “so heavy – and practically impossible”, the organization writes, that pension administrators “may waive this option”.

‘Not too optimistic’

The second uncertainty is the pension reform. In 2019, the previous cabinet agreed with trade unions and employers that the supplementary pension will be changed. Around 2026, pension funds will split their one, large pension pot into all kinds of personal pension pots.