How To Close the Funding Gap in Dutch Pension Plans? Impact on Generations

Pension plan sponsors in the Netherlands are facing their second funding challenge in the past decade, this one more severe than the first. Following the economic crash in 2008-2009, the funding levels of most plans fell below the 105-percent threshold set by the Dutch supervisor, De Nederlandsche Bank, which requires recovery of the minimum funding ratio within five years. It is not yet clear, however, how plans will make up the deficits – except from profiting from a recovery of financial markets – and how the burden of any necessary adjustments will be spread among workers and retirees. Although earlier in the decade most Dutch pension plans were restructured to include automatic reductions in benefit indexation if funding drops below given thresholds, that mechanism may not be enough to achieve recovery this time around. Policymakers now have to consider more substantial measures, including contribution increases and nominal benefit cuts, actions few anticipated would be necessary.

This brief proceeds as follows. The first section describes the evolution of Dutch pension funds over the past decade. The second section discusses the impact of the recent economic crisis on the pension funds. The third section examines the implications of various policy options for intergenerational risk sharing. The final section concludes that policymakers should consider improved plan design when making solvency adjustments.