Munich Personal RePEc Archive

Are there fault lines in the Netherland's pension provision?

De Koning, Kees (2019): Are there fault lines in the Netherland's pension provision?

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According to the latest data from the OECD, from all OECD countries Denmark came out on top with an accumulated pension savings representing 199.0% of the Danish GDP. The Netherlands came second with an accumulated pension fund savings of 171% of GDP.

Size matters, especially the changes in size that have taken place over time. For instance in 2007, the Assets Under Management (AUM) of all Dutch pension funds represented just 108.8% of the 2007 Dutch GDP level. Since then, Dutch pension fund assets have grown much faster than GDP levels. Size also matters for the Dutch government debt levels. In 1995 it reached its highest level of the last 24 years at 73.1% of GDP; the level stood at 56.8% in 2009 and by 2018 the level was 52.4%. Over time, Dutch Finance Ministers have managed to reduce the borrowing levels; in other words taxes were used to repay outstanding government debt levels relative to GDP levels.

The 52.4% of GDP represents €406 billion in Dutch government debt for 2018. Compare this to the total savings in Dutch pension funds in 2019 of € 1428 billion and it is clear that all pension funds together could potentially only invest 28.4% of their portfolio in Dutch government bonds. Of course, this is unrealistic given that some private domestic and foreign investors might wish to buy some Dutch government bonds as well.

The ECB has been a buyer of bank bonds since 2015. Its Quantitative Easing program of €2.6 trillion is spread over all Eurozone countries on basis of each country’s relative share in the Eurozone GDP. With the Dutch share of 4.8% of the Eurozone GDP, such purchases amounted to €125 billion. This leaves Dutch pension funds with a much-reduced opportunity to buy Dutch bank risks.

The flaws in the Dutch pension system are linked with the government’s assessment of the adequacy of providing for future pension payouts. The law states that such assessment should be made on basis of the Ultimate Forward Rate, which in 2015 was reduced to 3.3%.

Three factors are currently in play: negative interest rates on government bonds; diminished Dutch bank risks on offer due to ECB’s quantitative easing and thirdly the expected slow down in economic growth, which is already manifesting itself in the sharp drop of share prices on the European stock markets.

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