Han Dieperink: Three issues regarding pensions that need improving
This column was originally written in Dutch. This is an English translation.
By Han Dieperink, written in a personal capacity
The transition to a new pension system shows that there is room for improvement. The focus should be less on the nominal outcome, less on career risk, and more on return.
In theory, building up a good pension is simple. Start early to take advantage of Einstein's eighth wonder of the world: the power of compound interest. Don't save. Although saving involves less risk in the short term, disappointment is guaranteed in the long term. Invest, because that ensures that some 80% of your pension consists of returns earned before and even after your retirement date. Yet this is not done enough in the current pension system, ironically precisely to prevent accidents with pensions. There is a strong focus on nominal obligations in the future, which has suddenly made investing for retirement much riskier, partly due to the dependence on the current interest rate. Moreover, these future requirements are nominal, while real requirements would be much more logical for that long-term goal. But a good nominal coverage ratio is a requirement, a real pension adjusted for inflation is unfortunately no more than an ambition. This was not such a problem under the final pay system, but it has clearly become more of an issue under the career average system, especially in connection with the high inflation of recent years.
In the context of the transition to a new pension system, many pension funds are currently being compared with each other. This is not easy, because there are many variables that play a role. What is striking, however, are the large differences in returns in the various investment categories, and often also an incomprehensible investment mix. This is often because many pension funds invest much more safely than necessary, even when there is nothing wrong with the funding ratios. This desire to invest safely does not necessarily come from the participants. They just want a good pension. This perceived security is mainly a result of the fact that the career risks of administrators and supervisors in the pension sector must be minimised. But what is good for the administrators and supervisors involved does not immediately result in a higher pension. They forget that return and risk go hand in hand.
It is striking how poorly pension funds communicate about the interim development of pensions. It is difficult to find anything in annual reports or on websites about the fact that pensions have not been indexed for some time. But there is extensive communication about making pensions more sustainable. So extensive that you begin to wonder if they have something to hide. This is reminiscent of companies that also sometimes report extensively on sustainability, usually just when there is no good operational news to report. The composition of the pension fund has also become too sensitive to political wishes, demands and hobbies. It does not help that politicians often take a job in the pension world and then do everything they can to continue their career in politics afterwards. And yes, people from the trade union are often also politicians. Instead of the eternal focus of pension funds on costs and sustainability, there should be more discussion about investing.