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Falling share prices have recently resulted in serious losses for Dutch occupational pension funds, placing pensions cover in jeopardy. Additionally, pension funds appear to have been used by many companies during the recent years of economic prosperity not solely for the purposes of paying out pensions. Pensioners fear that this has placed future payments from the funds in question and threatened indexation of pensions. Former employees of various companies have thus instituted legal proceedings against their former employers. In September 2002, the supervisory body for pension funds, the PVK, joined the ranks of the critics and issued stringent new rules governing fund administration.
Occupational pension funds have recently suffered grave losses resulting from sharply declining share prices. It would also appear that during the preceding years of economic prosperity, many companies used their pension funds for purposes other than simply paying out pensions. The construction company HBG is one of a number of companies against which retired employees have instituted legal proceedings in the hope of forcing the company to redeposit into its pension fund money previously transferred for other purposes (NL0108142F).
Over the past few years, HBG has reportedly taken surplus profits from the fund, but now finds itself facing a shortfall as a result of dramatically lower share prices. The former employees are demanding a supplementary deposit of no less than EUR 76 million over and above the extra EUR 14 million the company has already paid into the fund. For the time being, HBG is refusing to do so. This has prompted the former employees to threaten legal action. The company claims that it was entitled to skim off surplus profits of EUR 79 million from the pension fund between 1996 and 2000. Former employees, on the other hand, allege that this measure helped to present the company’s operating results in a favourable light, while significant losses were being booked in Germany. Over the same period, employees enjoyed non-contributory occupational pensions. However, pensioners now claim that the company's transfer out of the fund of positive investment results has left insufficient leeway for the creation of much needed reserves. The percentage of cover under the HBG fund has slipped to 110%, and sharply declining capital reserves have made it impossible to pay out annual pension adjustments in line with price increases. HBG has since redeposited EUR 14 million in an effort to facilitate payment of the inflation correction of 4.5% to pensioners. The company considers this a unique, one-off necessity; index-linked pensions are seen as a desirable goal by HBG, but only as a long as sufficient resources are available to achieve this. Former employees now fear that their rights may well be eroded in the future. In their opinion, the company's withdrawals from its pension fund were wrongful: despite being stipulated in the company’s articles of association, the agreements reached in this regard between HBG and its pension fund were not approved by the relevant supervisory body, the Pension and Insurance Chamber (Pensioen- en Verzekeringskamer, PVK).
Mergers and acquisitions create further problems
The situation at HBG is further complicated by the fact that the company was taken over by Dragados and then, shortly thereafter, resold to BAM NBM. For BAM NBM, the immediate priority following the takeover was to reinforce its equity capital, and HBG's pension obligations were given far less significance. The consequences of takeovers therefore affect occupational pension funds too. A good example of this can be seen in a recent conflict concerning the pensions insurer, Optas. Optas has become the largest pensions insurer for dock workers, and employees and employers at the port of Rotterdam are now claiming more than EUR 500 million, the amount that the port sector pensions fund put into Optas Pensioenen NV in 1998. The port employers and employees consider this to be their equity capital. The amount was contributed by them in 1998 and they wish to retain their rights when it comes to determining how it is spent (they are hoping to enhance pensions for a specific employee group). However, Optas believes that such rights were waived in 1998. This case has also been brought before the courts.
Such issues involve four parties with partly conflicting interests: the company, the formally independent pension fund, the company’s current employees making contributions and the company’s former employees who receive an income from the pension fund. It is apparent from the HBG case that mutual relations between the various parties are not a watertight arrangement, in which finances from the pension reserve can be reverted to the company (subject to the approval of the pension fund board). A current dispute involving the KLM airline exposes the friction that can arise between the interests of current and former employees: while retired employees at the firm are concerned by their pension rights and maintaining the company pension fund's accrued capital, current employees want to keep pension contributions as low as possible - potentially, this could deliver a net pay increase of some 10%. This matter has also been brought before the courts by the airline’s former employees (pilots).
More stringent administration rules
These conflicts have been fanned by the impact of economic fluctuations and ailing share prices on the capital reserves of occupational pension funds. A former trade union official and manager of one of the funds sums up the situation as follows: favourable share price trends between 1998 and 2000 tempted quite a few funds to pursue a short-term 'give-away' policy in which contributions were slashed and monies were pumped back into the companies' coffers. The situation has changed dramatically over the last year and capital invested in the stock market has lost much of its value. Furthermore, interest rates have dropped. On average, some 45% of pension funds were invested in shares - which are more risky than bonds - in 2001.
At the end of September 2002, the supervisory PVK, an umbrella organisation for pension funds, issued a set of more stringent rules, whereby occupational pension funds must build up their buffers and limit the risks involved. The PVK informed the funds that they are obliged to accrue greater reserves in order to deal with recent developments such as deflated share prices. The funds are to be more careful with respect to bonds as well. The PVK believes that a percentage of pensions cover of 110% is healthy, and is now linking this to the AEX Dutch stock-exchange index: if the latter drops below the 300-point level, this endangers a large proportion of the capital accrued by the funds.
Pension funds must immediately and voluntarily notify the supervisory body if they are not in a position to comply with the new stricter rules. For a number of funds - which currently have cover that falls below the 100% mark - this means that the companies will have to make supplementary deposits. Some 30% of the funds have insufficient financial backing, while the occupational pension sector as a whole is in the 'danger zone' and facing a major shortfall. Although spokespersons for the funds have welcomed the PVK's more explicit rules, they are not planning to sell off their shares en masse; this could potentially result in even greater damage in the short term.
Employee representatives in the construction sector have already announced that they would be prepared to pay higher occupational pension contributions if part of the added load would be carried by the employers. However, the Dutch Trade Union Federation (Federatie Nederlandse Vakbeweging, FNV) as a whole is more reserved in its response. It believes that the Dutch government should intervene with the PVK, on the grounds that its proposed measures could lead to forced share sales, an unnecessary significant increase in pension contributions and deferment of price indexation in pension payments. The proposal put forward by the PVK has come at a time when the social partners on the tripartite Social and Economic Council (Sociaal- Economische Raad, SER) have advised the government to permit the temporary lack of cover which is currently plaguing pension funds.
However, pensioners support the PVK's initiative. They argue that so far the interests of active employees and employers in low pension contributions have prevailed over the future interests of these employees and the present pension security of retired employees. In their view, pension indexation is established in common law and the funds should guarantee the necessary financing.
Commentary
The PVK’s intervention in the policy arena traditionally inhabited by the pension funds serves to underscore - from a perspective of policy responsibility - the correctness of the position of pensioners, who have only recently been able to play an advisory role in the administration of the funds. This responsibility was previously enjoyed only by the social partners. Although the objectives of the pension funds are pretty clear - to provide pension facilities for former employees - two pitfalls appear to have been exposed that relate to managing their capital reserves: taking high risks to generate high yields and then utilising the ample financial resources for purposes unrelated to the funds. Recommendations put forward by the SER and bipartite Labour Foundation (Stichting van de Arbeid, STAR) on greater authority for pensioners, a more active role for the PVK and a new pensions law (shelved in the Lower House of parliament since its submission shortly prior to the last general elections earlier in 2002) will serve to limit pension fund administrators’ scope for action. Nonetheless, occupational pension contributions will be raised. Such increases will no doubt eat up any pay rises and the unions have therefore recently taken this into consideration in setting their wage demands. The upwards pressure this places on wage costs is not in the best interests of employers and has not been greeted enthusiastically by the government, given the danger of inflation. (Marianne Grünell, HSI)