The hooks and eyes of another discount rate

This is a super technical subject. Yet the actuarial interest rate of pension funds has been a hot topic for years. It is now a blockade in the negotiations on a pension agreement, which should lead to a new supplementary pension, which employees save in addition to the basic pension AOW

to use the discount rate, he said Monday in NRC . CNV and VCP unions support this requirement. For Minister Wouter Koolmees (Social Affairs, D66), this is unacceptable, as for the Nederlandsche Bank.

Elzinga's request caused irritation among other negotiators on Monday. Should this be publicly pronounced? The same day, Koolmees, employers and unions met again. The minister is actively negotiating. During an hour-long conversation, it appeared that Koolmees and the unions still wanted to get closer, even though both parties remained true to their point of view. FNV

Pot Distribution

Why is this interest so important for negotiators and politicians? It determines how the large pension fund is divided into different generations and, for example, how quickly pensions can rise again with prices. The unions want pensions to be raised after years of stagnation.

Pension funds use the discount rate to calculate the amount of cash they need now to be able to pay future pension payments. Suppose that a pension fund must have 1,000 euros in cash in fifty years. At a discount rate of 2% (on an annual basis), it should have 380 euros in cash. This will increase to 1,000 euros in 50 years. If you increase this discount rate to 4%, the fund will now have much less cash: EUR 145.

Since the theoretical interest rate is low, the funds must have a lot of liquidity. This does not leave money to increase pensions. With funds, even cuts are threatening. According to pension funds and unions, it is very strange that the economy is doing well now.

The discount rate is also low because the funds now guarantee the payment of a future pension. To fulfill this promise, they must count carefully. This guarantee will disappear if it depends on the government and the social partners. With the new pension, the funds would have more than to give themselves an "ambition" on the level of the final pension.

The unions say: if this certainty disappears, it is no longer necessary to count with such care. Coen Teulings, former director of the Bureau for Economic Policy Analysis of the Netherlands, agrees. He recently wrote in [Het Financieele Dagblad] .

Other economists also understand this reasoning. Ilja Boelaars, a doctoral student at the University of Chicago and an active D66 member, has worked for years on the interests of young people in retirement and often comes before unions. It is quite possible, he says, to use a different discount rate. But only then once the new system has started. This can not change the distribution of the current pension fund. And you must prevent a generation from benefiting disproportionately. "You can use any interest, if you do it with honesty and consistency."

Intention

An important question, economists say, is: what is the intention of unions and pension funds to demand a higher discount rate? Do they only want to be able to increase pensions quickly, even if it is done at the expense of young people? This mistrust continues in the speeches. Bas Jacobs, professor of economics at Erasmus University: "I'm afraid that if things are going well, the unions would like to take advantage of the unexpected fallout. And if things go wrong, they are not forced to deal with setbacks on how the funds will spread the setbacks and setbacks of investment results among retirees.

Read also: The stagnant polders fix Koolmees

Jacobs also fears that some pension funds are taking too much risk in terms of investment if the payment of their pension becomes less certain. "As a result, they can get high returns in the short term, but in the long run this can be unpleasant for young people because the risk of setbacks will also increase.When I add these concerns, I understand why Koolmees and De Nederlandsche Bank maintains a low discount rate. "

Nevertheless, there is quite a compromise between Koolmees and the unions. The actuarial interest rate will then increase, but firm agreements will be made to divide the profits and losses between generations.

The discussion will not last long, predicts Boelaars. "It's still the discount rate, because it's really the distribution of the intergenerational pension fund." It is only in a purely individual system, with personal pension funds, that the arithmetic debate would be over. These pots were in coalition agreement, but have been abandoned for a long time in negotiations with the polders.