With the capital, we must be able to pay the pensions of all our participants now and in the future. To determine whether we have enough capital for this, we use an interest rate: the actuarial interest rate. How this actuarial interest rate is calculated is a political decision laid down in law. If interest rates fall, we need more capital to pay out pensions.
The government determines that the value of the pensions to be paid out must be calculated on the basis of market value. That is why the Dutch Central Bank calculates the actuarial interest rate. The Dutch Central Bank sets the actuarial interest rate on the basis of various interest rates in the financial markets. Supply and demand in these markets are seen as the most objective indicator. The higher the actuarial interest rate, the less capital pension funds must have by law to pay out all pensions now and in the future. The lower the actuarial interest rate, the more capital they must have. DNB sets a risk-free actuarial interest rate. This means that this interest rate will almost certainly be achieved.
The risk-free interest rate is the rate of return that is almost certain to be achieved on investments. Based on that estimate, pension funds calculate how much capital they should have now, in order that they can be sure to pay out current and future pensions (to old and young generations). It is comparable to a savings account where you want to end up with a certain amount over a number of years. The higher the interest rate, the less money you need to put into your account to reach the desired amount.
The actual return on investments is often higher than the risk-free actuarial interest rate. Pleas for raising the actuarial interest rate are frequently heard. In that case, pension funds would need less capital now. This would reduce the need to reduce pensions and may allow pensions to be raised sooner. DNB’s independent advice is not to increase the actuarial interest rate. According to DNB, a higher actuarial interest rate entails the risk that there may not be enough pension left for future generations.
Lawmakers have laid down in law that the actuarial interest rate must be calculated on the basis of the market value. From time to time, the rules (‘parameters’) for determining the market value are adjusted, giving pension funds more or less leeway. Politicians and society at large argue about the actuarial interest rate that should be used now, in the existing pension system. Politicians and social partners are also discussing the actuarial interest rate to be used in the future system. In June last year, an agreement was reached on a new pension system, and all those involved are now looking into the question of what role the actuarial interest rate should play in it. Do you want to know more about the pension agreement? Then take a look at the frequently asked questions and answers about the pension agreement.
Both young and older generations must be able to count on us for a good pension. By calculating using a risk-free interest rate, we know for sure that we will be able to deliver the promised pension benefits. At the same time, we also understand that something has to change in the current pension system. Due to the fall in interest rates, the coverage ratios of the pension funds have been under pressure for a long time and there is a risk that pension benefits will be reduced, even though pension funds have much cash at the moment. It was agreed in the pension agreement that pensions will move more in line with the economy in the new pension system. This increases the likelihood that we will be able to increase pensions sooner than is the case now. The downside is that as soon as the coverage ratio falls below 100%, we have to reduce the pension benefits immediately in the new system.
We use the risk-free interest rate to calculate how much capital we need. This is in order to be almost certain that we can pay out the pension benefits. Now and in the future. In order for our participants' capital to grow, investments are necessary. In the risks we take in doing so, we take the wishes of our participants into account. We therefore regularly check their views on investing and the risks involved.
Our participants want:
- to be sure of a minimum amount of pension.
- to take slightly more risk with the chance of a higher pension, and
- would rather have a greater chance of a small reduction than a smaller chance of a large reduction.
No, different interest rates are used in Europe. The European pension regulator EIOPA is considering one European calculation method for pension funds. The preferred method of calculation is based on the interest rates of recent years. This is different from the Dutch method, which is based on current market interest rates. This is considered to be ‘possibly insufficiently stable’. The EIOPA believes that an average historical interest rate is more indicative of expected long-term interest rates.
The cautious notional interest rate is not only disadvantageous for pensioners, but also for the pensions of participants who are accruing or have accrued a pension. Those pensions have not been increased either. In everything we do, we look closely at the interests of all participants and pensioners.Because a buffer must be maintained in addition to the cautious notional interest rate, these pensions are less likely to be increased.
We stand up for the interests of our participants and pensioners in various ways. For example, by talking to DNB and the Ministry of Social Affairs and Employment. But we also make our voice heard within the Pension Federation. In addition, we participate in various research tables through the knowledge organisation Netspar.