When Ajax won the Champions League in 1995, Dutch football clubs became under the illusion that they could finally compete with the big boys. However, with the advent of the Champions League, a good youth development became increasingly irrelevant while television rights and sponsorship income became more and more important. The Dutch (top) teams realized too late that the playing field had changed, but this did not prevent that some of these (after extravagant spending patterns) had to be saved by the tax payer. It would appear that the Dutch pension system too has come too late to new insights.
The current pension system is completely reactive. The discount rate trick makes funds temporarily solvent. However, the past shows that these artificial tricks are only effective until a new crisis occurs.
The current pension system is designed to give long term security, but offers only uncertainty. The historical developments of the ABP scheme speak for themselves: the defined benefit system turned out to be too expensive in 2004, indexing appeared impossible after 2008, the FPU applies only for participants born before 1950 (why age discrimination?), and the pension age was increased after 2008 (bad luck for younger participants).
The acclaimed pension solidarity turned out to be a sham: when the funding ratios decreased below 100%, young people rightly wondered what to expect from a vehicle whose returns are highly uncertain. Understandable, because the active investment management of pension funds has not been able to consistently outperform passive indices over a longer period. Years of prosperity had also led to abuses which were only to be discussed during the crisis: lower educated participants implicitly pay for longer-living highly educated policyholders, no transparency about individual pension benefits and costs, and poor (investment) knowledge of pension boards who invested with other people’s money without having to suffer the consequences if things go wrong.
Society has individualized over the past 25 years: people choose banks, holiday destinations, and beliefs themselves. The Internet makes the added value of experts increasingly less obvious. However, this increase in choice has not taken place at pension funds which is also entirely logical: if you have a monopoly over your customers why innovate? Because participants are not able to vote with their feet, it is waiting for the next crisis before new rules come into force. The helplessness among the participants is characteristic.
The discount rate adjustment is therefore only palliative while underlying problems remain: the current system leads to lazy pension-consumers and pension-providers in which each participant interprets (or abuses!) solidarity in a different way. During periods of underfunding it is a matter of every man for himself. Also, the sustainability of pension schemes proved short-lived: nice for actuaries to come up with new calculations, less fun for the participants since they are again in uncertainty. Apparently predicting the future turns out a lot harder than everyone thought.
However, the economic crisis puts these shortcomings exposed so that there is now the ideal opportunity for improvements: choice of saving (no pension tax perks), and fund selection are essential instead of math tricks that work until the next black swan swims along.
In short, it’s time for a personal pension!
This article was also published in the Dutch magazine “De Actuaris” of May 2012.