The Dutch population is aging. And that has an impact on all sorts of things, such as the housing market, the healthcare system, the economy, the labor market and the pension system. In a series of articles, we cover these topics using interviews with an expert and with people who are part of the gray wave. This time, APG's actuary Caroline Bruls and entrepreneur Appie El Hatri (61) on the impact of the gray wave on our pension system.

“When life expectancy increases, it affects pensions," Bruls begins. After all, an increase in life expectancy means that pensions have to be paid out for longer. "In the current pension system, the way it works is that if life expectancy increases, the funding ratio decreases. So the financial position of pension funds gets worse. Premiums will also have to be increased for pensions in the future. Or we have to retire at a later age."

Still, Bruls speaks of a robust pension system. “Basically, we have everything set up really well in the Netherlands.” She is referring to the three-pillar model. “The first pillar, the state pension, is there for all Dutch people, regardless of whether you have worked or not.” The system is financed through pay-as-you-go; the working people pay for the state pension beneficiaries. Therein lies a challenge due to the ever-aging population, Bruls acknowledges. “Then there are a number of knobs that can be turned, one of which is raising the state pension age. When it was set at 65, we did not live nearly as long as we do now. In order to balance the ratio between the period that people work and pay pension premiums and the period that they receive pensions, it has been established that the state pension age should move with life expectancy.” Other measures could be an increase in the premium, or reducing the benefit over time. However, the latter seems unwise to Bruls. “There are several reasons for that. That would hit people with small pensions really hard. You don’t want that. Plus, this also directly affects the economy, because seniors’ spending level would drop as a result.”

Supplementary scheme
In addition to the first pillar, there is the second pillar: pension accrual through the employer. “About 90 percent of employers have a supplementary pension scheme. This gives retired employees an additional benefit on top of the state pension,” Bruls explained. The second pillar is financed by capital funding. “This one is therefore less sensitive to aging.”

There is also a third pillar; a pension product in an escrow account that must be paid out no later than when participants reach the state pension age plus five years. Bruls: “These include (tax) regulated pension products and the pension for the self-employed. Some people also include savings or their own home in this pillar. I see that more as the fourth pillar, which can be used if people want to retire early. Then they leave their pension accrual untouched, but sell their house, move down in size, and the money is then used as a retirement provision. Once they reach retirement age, they will receive the state pension and a pension benefit.”

Impact of stock market and interest rate shocks
Looking at the statistics, by the way, she says the impact of increasing life expectancy on pensions is manageable. “Especially if you compare it to the impact that fluctuations in the stock market or interest rate shocks have on it. The impact of adjustments to life expectancy is really dwarfed by that.” Incidentally, according to Bruls, APG keeps close track of developments in life expectancy. “Although we are continuing to live longer, life expectancy is no longer rising as fast as it has been in the past hundred years. However, the biggest gains in terms of improving living conditions and health have now been achieved. That projection of life expectancy is updated every one or two years, and thus remains quite current. It has to, because there are obviously constant developments that affect life expectancy.”

Bruls also notes, looking at those same statistics, that, on average, people are retiring later and later in life. “Look, the raising of the state pension age is obviously fueling this. But people who retire early are also, on average, doing so later than, say, a decade ago. Where people used retire at 63, for example, they now do so at age 65.”

Een derde uit eerste pijler
The three-pillar system is not unique in the world, but the good balance between the first and second pillars is. This assures a large part of the Dutch population of an income later in life. “Of the total pension, on average about one-third comes from the first pillar, two-thirds from the second pillar,” Bruls knows. “The same will be true in the renewed system. One difference between the current and the renewed system, however, is that the average premium will disappear.”

The average premium is an equal premium percentage for all participants with equal pension accrual. In simple terms, it means that young people will receive less pension for their deposited contributions in the future. So, comparatively, they are paying too much. So what exactly is the situation? Currently, every 100 euros that a 24-year-old deposits has more than 40 years to create more value. This can be done through investments or interest, for example. But every 100 euros that a 64-year-old pays in in pension contributions has virtually no more time to generate returns, and yet 100 euros from a 64-year-old yields the same pension as 100 euros from a 24-year-old. This is possible because the high returns from young people are also used for the pensions of the elderly. That was a workable system for decades, because most people stayed with the same employer and the same pension fund for a long time. A young person would naturally grow old and would thus be compensated years later by the new young people. With the changing labor market, this system came under pressure. “The elimination of the average contribution in the new regime is also a wise choice in view of the aging population. The average premium becomes higher as the aging population within a pension fund increases, because pension accrual by older participants is more expensive. Everyone has to contribute to that. In the new system, the premium becomes individual. Every euro that young people pay into a pension will go into a separate pot,” Bruls said. She also immediately dispels the myth that because of the aging population there is not enough money left for young people. “That is absolutely not true; not in the old system and certainly not in the renewed system.”