Yawning deficits force Dutch pension funds to cut payouts Marianne Keestra, a former teacher in the Dutch city of Haarlem, has seen her monthly pension payments cut, and she knows who she blames - her former employer. "The government stuck their hand in the pension pot," says Ms Keestra, 71. And they never paid it back. For years, the Dutch government and many businesses systematically underfunded their employee pension plans, relying on high investment returns to make up the shortfall. Now, a combination of record low rates, sluggish economic growth and lives that last far longer than anyone imagined even a decade ago have resulted in yawning deficits. At the end of 2012, the funds were €30bn short of what is needed to cover promised benefits. For the Dutch, the cutbacks are the first ever in a nation which has the second largest "defined benefit" system in Europe. But defined benefit provision, under which pensioners are guaranteed a portion of their salary for as long as they live, is unravelling under the pressure of the financial crisis and ensuing recession. In April, under orders from the Dutch central bank, 66 of the country's 415 pension funds started cutting their payouts. The average cut is around 2 per cent of the monthly benefit, but that figure conceals a wide range. APB, Ms Keestra's fund and also the country's largest with 2.8m participants, has cut payments by 0.5 per cent, but smaller funds such as those for barbers and meat packers are cutting pension payouts by 7 per cent or more. The loss of income to pensioners has dealt a further blow to a Dutch economy that has already shrunk 1 per cent over the past year and is suffering from record-low consumer confidence levels. Meanwhile, anger over the cuts has bolstered the fortunes of the 50Plus party, which won election to the Dutch parliament for the first time last year on promises to defend the interests of pensioners. "Grey vote" fears further cuts The power of the Dutch "grey vote" has grown amid fears that looming budget cuts will hit the elderly, writes Matthew Steinglass. The 50Plus party entered parliament for the first time last year after calling for relaxed pension accounting rules to avoid benefit cuts. It also takes a firm stand against pushing back the retirement age. By January, as anxiety over cuts in healthcare subsidies mounted, polls showed the party's support skyrocketing to over 10 per cent, before falling back somewhat in more recent surveys. The party is led by 63-year-old Henk Krol, a former gay rights activist previously best known as the longtime editor of the Netherlands" first gay newspaper. A talented publicist with a knack for soundbites, Mr Krol has brought a certain elan to pensioners" issues, vowing in interviews to "slap the government on the ears" if it tries to cut benefits any further. 50Plus is among several Dutch opposition parties whose ideological position is hard to place. Like many of his voters, Mr Krol is a former member of the centre-right Liberals, but the party's hardline defence of social benefits for seniors puts it to the left of the centre-left Labour party. The party's toughest fights so far have come over issues of generational distribution, as the Dutch government calculates how its budget cuts affect different age categories. In negotiations this spring between the government, unions and employers, Mr Krol argued strongly against allowing businesses to fire workers more easily, saying older workers found it impossible to find new jobs. But with Dutch youth unemployment rising, that argument pits older workers directly against younger ones who could be more easily hired if businesses were not locked in labour-law protections. While the woes of Dutch pension schemes are far from unique, the Netherlands stands out because its laws allow employers to cut benefits under certain circumstances. Dutch pension schemes are among the most tightly regulated of any in Europe or North America. By law, they must hold sufficient assets to cover 105 per cent of promised benefits, unlike those elsewhere allowed to run huge deficits. In addition, they have no leeway in setting the parameters that determine estimates of liabilities, such as expected investment returns or the number of years retirees will draw benefits. Moreover, unlike the US, UK and many other countries, the Netherlands does not operate a pension insurance scheme to pay benefits to the underfunded schemes of insolvent employers. The fallout from the failure of a company or industry-wide scheme could be devastating, which explains why the rules are so tough. In 2007, Dutch schemes held assets covering 152 per cent of promised benefits. But that fell to 102 per cent last year due to low interest rates - which have the effect of making liabilities balloon - and sharp falls in stock and property markets. "The law says that accrued benefits can only be reduced if it is the last resort and if it is needed to meet their minimum requirement of 105 per cent," says Wichert Hoekert, an Amsterdam-based consultant at actuaries Towers Watson. But Dutch pension funding requirements are less strict than they once were. Last September the parliament, under pressure from older voters, approved new rules that allow pension schemes to use a higher rate to gauge the pace at which inflation will erode liabilities. This has lowered liabilities, and funding targets. The sector as a whole now has a coverage ratio of 105 per cent under the new rules, but just 101 per cent under the old rules, according to an analysis by Aon Hewitt. Some Dutch analysts criticise the new rules as gimmickry that will weaken the plans. "Tweaking the discount rate is just a bookkeeping trick to bring down liabilities," said Bas Jacobs, an economics professor at Erasmus University. While figures using the new discount rate show the pension sector as a whole has just enough assets to meet its liabilities, Mr Jacobs said he "wouldn't be surprised if the pension plans actually had a shortfall of €100bn-€200bn." There are arguments that employers benefited from schemes, too. Hefty investment returns during the 1990s allowed many to avoid putting any cash in at all for years. In addition, Dutch tax rules allowed employers to offer early retirement, reducing payrolls and improving corporate profitability. As at 2007, a quarter of Dutch retirees were below the age of 60. Early retirement has proved extremely expensive for defined benefit schemes, especially as longevity has risen sharply. On average, Dutch men aged 65 can expect to live for another 18 years as of 2011, up from just 15.5 years a decade earlier. As equities markets have improved, the pensions funds" problems have grown less severe. The funds now have €1.07tn in assets, up from €831bn at the end of 2011, and administrators say that once the current round of cuts is complete at the end of the year every plan will meet its minimum coverage ratio. But for Ms Keestra, that does not settle the story. It's not just the benefit cuts. I haven't seen a cost-of-living increase in years," she said. Resuming full indexing for inflation would require the coverage ratio to rise to 135 per cent, and Dutch administrators are making no promises.