Professor in favour of a more flexible pension system and more risk awareness
“Netspar is first and foremost a scientific network so we don’t have an agenda. We simply identify the facts,” says Casper van Ewijk, the recently appointed general director of the joint think tank of government bodies, universities, pension funds and insurers.
Netspar carries out research on the pension system of the Netherlands and provides information on the potential consequences of an aging population and changes to pension policy. For many years Van Ewijk has also held the position of professor of macroeconomics at the University of Amsterdam School of Economics. Van Ewijk: “My research and teaching focuses on pensions. But I don’t really want to discuss the recently concluded Pension Agreement between social partners and the government. That is primarily a cutback measure that only impacts the tax provision of pensions. There is a reduction in the tax-deductible amount employees can save so premiums received by pension funds will be lowered. This will lead to a drop in pension accruals. It’s not a structural adjustment to the pension system but it is still important people realise that they are accruing less pension. Otherwise they’ll find out forty years from now.”
Choices up to politicians
Netspar studies and analyses alternatives for pension policy and identifies problems or underlying causes. “It’s up to politicians to make choices. We present possible ways that could lead to solutions rather than specific recommendations. Our strength lies in analysis based on a combination of finance and economics; we work with excellent researchers who also have extensive expertise in financial markets. We can make calculations for a wide variety of groups, based on accurate prices. The available data we can work with make the Netherlands unique in the world, as does the debate that emerged in society regarding the generational conflict. Older people were worried that after years of paying premiums they wouldn’t receive enough while younger people thought that they would have to pay for the retirees. We were able to make precise calculations in relation to these effects and in the end it turned out that both groups share the burden evenly; all generations have to make some kind of concession. This was something we could clearly demonstrate.”
Van Ewijk admits that there is a great deal for Netspar to do in the field of communication, in spite of many efforts made in past years. “Few people understand pensions and most hold the traditional view about their own pension: things will work out just fine. But starting in 2002, a silent revolution has taken place. Almost all pension funds have switched from a final-salary pension scheme, where one would normally receive 70% of their final salary as their pension, to an average salary pension scheme. With an accrual factor of 1.875% per year, that means that after 40 years of working an employee receives a pension that is (40 x 1.875 =) 75% of his or her average salary. And then you still have to wait and see if there are good investment results and whether this 75% is indexed for inflation. Without indexing you might only retain 30%. There are also large groups such as women, freelancers and the temporarily unemployed who don’t accrue a full pension each year for 40 years.
According to Van Ewijk, all experts agree that the pension system needs to be overhauled: “We have noticed that our current system is unable to adequately cope with major shocks. So something needs to change. And because there are not enough youngsters, setbacks can no longer be passed on to the next generation like we used to do. Raising premiums, another way of dealing with setbacks, is disastrous for the economy. That became apparent in 2002 when premiums were raised by 5%. It led to a full-blown pension crisis. We realise that now.”
Risky investments are unavoidable
Van Ewijk cannot emphasise enough that risks associated with investments are unavoidable. “If you want a good pension, part of it must be invested in shares to obtain sufficient returns. For a guaranteed pension you would have to invest 40% of your income instead of the 18-20% currently invested. So the results can be better or worse than expected.” With satisfaction he adds that there is a pension provider now advertising with the slogan ‘A good pension is an risky pension’. “That’s what I’ve been saying for years. People have to get used to that idea.”
Van Ewijk says it’s his mission to contribute to an effective pension system in the Netherlands. “A modern system with much more flexibility than the current standard options. I envision a system that, for example, takes into account the needs of different types of people, one that offers more alternatives in case of career changes and multiple employers. And maybe during an economic crisis employees could opt out of pension saving for a year. More attention should be paid to individual situations.” Van Ewijk can give numerous examples of how pensions might be in the future, from varying degrees and maybe only a part of the pension should be obligatory. But he is convinced about one thing: “We have to help people in some way with their pensions. And I emphasise that economists are not quick to say this. But looking at all the international examples, it’s clear that things will go wrong if you leave people to do it all by themselves; they don’t save enough and they make bad investments.”