PDN's ambitions
PDN is pursuing a number of ambitions. One of these ambitions is pension indexation or full pension indexation, i.e. adjusting pensions and pension accrual to changes in value. With this, we want to preserve the purchasing power of pensions, now and in the future.
Maintaining purchasing power means that, even if prices rise, you as a member can continue to purchase the same amount of shopping with your pension now and in the future. PDN wants this for everyone, including all pensioners, employees, or former employees. We prefer to increase the pension for pensioners and deferred members (former employees) in line with price increases. For active members (employees and people who are disabled), our ambition is to have the accrual of pension increase in line with the increase in wages.
Policy funding level
Increasing pensions depends on the fund's policy funding level1. This policy funding level must satisfy a number of statutory conditions before we are allowed to increase pensions. The policy funding level must be at least 110% before a pension fund in the Netherlands is allowed to apply partial indexation. PDN may only grant full indexation at 123%. De Nederlandsche Bank supervises the enforcement of the statutory conditions.
PDN's financial situation has clearly improved since the end of 2020. Whereas the funding level at the end of 2020 was 99.7%, it was 111% in November 2021. However, the fund still cannot meet one of its main ambitions: increasing pensions. Everyone, including those who are accruing pensions and those who receive them, has been lagging behind in terms of increases since 2008. Pensioners see this directly reflected in the purchasing power of their current pensions. With an unchanged pension, when many products become more expensive, you can buy fewer products.
The failure to achieve the required level of the policy funding level is primarily due to the actuarial interest rate with which pension funds have had to value their pension commitments, which has been steadily falling since 2008. As a result, the pension obligations have risen sharply since 2008, from EUR 4.1 billion to around EUR 7.3 billion by mid-November 2021. The declining interest rate also has a major impact on pension accrual. The fall in interest rates also made pension accrual much more expensive. This means that more money is needed to achieve the same pension accrual. Each year, PDN assesses whether the contribution paid is sufficient to finance the pension accrual. Due to the low interest rate, it was agreed that the pension accrual rate would be reduced from 1.738% to 1.4% as of January 1, 2021. The level of contributions you pay is also an agreement that the social partners, DSM, and the trade unions make together. PDN is outside of this.
Forecast for 2022
PDN is therefore mainly bound by statutory rules with regard to increasing pensions. Mainly because of good results on investments, the policy funding level in 2021 showed a positive development. PDN's assets have never been so significant in value, approximately EUR 8.1 billion. Unfortunately, it is not expected that PDN will be able to fulfill its ambition of full indexation in the short term and within the current rules. It is possible that in the coming year, partial indexation may be possible if funding levels continue to rise.
Recently, an additional motion was attached to the draft legislation on the new pension system. This motion should enable pension funds to increase their pensions once the policy funding level is above 105% (currently 110%). Whether pension funds do this is a consideration each Board has to make based on the financial situation as a whole. This also includes future developments. For example, indexation must not lead to an uncertain financial situation in the future. It is the duty of the Board to equally balance the interests of all generations of members. This regulation is expected to apply at the earliest in the second half of 2022. Once the regulations and conditions are entirely clear, we will inform you of how we, as PDN, intend to approach this.
1The policy funding level is the average funding level over the past twelve months.