Occupational Pensions

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Occupational Pensions

• Their role towards financial stability and
  changing social needs

Karel Noordzy, PGGM, Chairman of the Board of
Managing Directors Prague, March 7, 2005
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Agenda

• Sharing the Dutch experience
• Three significant characteristics
• The key functions of our system

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Definitions
Sharing the Dutch experience
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The Dutch mix of pension payments
Sharing the Dutch experience
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Introducing PGGM I
Sharing the Dutch experience

• Occupational pensions for Dutch health care
  sector
• Defined benefit
• Fully funded
• Assets 60 billion euro
• 4th in Europe, 2nd in the Netherlands
• Annual premium income 3 billion euro
• Active participants 1.1 million
• Pensioners 0.2 million
• Sleepers 0.6 million

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Introducing PGGM II
Sharing the Dutch experience

• Employment based
• Participants must have job in health care
• Paritarian governance
• Employees and employers in Board of Governors
• High solidarity
• e.g. young/old, men/women, healthy/sick
• Long term investment horizon
• Great investment results
• 8.6 p.a. over 10 years, 8.9 p.a. over 30 years
• No investment restrictions

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Introducing PGGM III
Sharing the Dutch experience

• Our target high quality DB pension at low cost
• For employees and employers
• Target pension (including State) at 65 70 (100
  after tax)
• Possible because
• Fully funded
• High solidarity
• Trust is key
• State fair deal, consistent policy
• Occupational pension promise kept
• Private contract fulfilment

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Sufficient trust in C. E. Europe?
Sharing the Dutch experience

• State system low pensions at high budgetary cost
• Remnants of very expensive old system
• Individual accounts not a solution
• Virtually no occupational pensions
• Employers still building up strength
• Trade unions focused on state system
• Private pensions costly and risky
• Quantitative restrictions
• Lack of education and information
• Lack of choice of providers and funds

Source Pragma Consulting
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Agenda

• Sharing the Dutch experience
• Three significant characteristics
• The key functions of our system

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1. Balancing fully funded and PAYGO
Three significant characteristics

• Advantages PAYGO (State system)
• Not sensitive to financial markets
• Immediate high payments possible
• Usually very high level of solidarity
• Advantages fully funded (Occupational)
• Not very sensitive to demographic developments
• Off-budget risk of deficit (or surplus)
• Potentially high level of solidarity
• Development national financial sector
• Our experience diversify risk by including both

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Balancing also antidote against greying
Three significant characteristics
(Source Börsch-Supan, 2004)
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2. Defined Benefits is fairest
Three significant characteristics

• Bear risk collectively, not individually
• Investment risk
• Conversion risk
• Take decisions by professionals, not individuals
• Build trust, minimize reputation risk
• What happens if a DC pension falls short?
• Enterprise guarantees pension or reputation risk
• Government fails to provide basic social service
• Enhance participation
• Our experience promote defined benefits

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3.Solidarity makes bigger return possible
Three significant characteristics
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3. Solidarity has other advantages
Three significant characteristics

• Increased predictability
• Lower liquidity needed
• Better investment mix
• Higher returns
• Fair division of unexpected costs and benefits
• Pension arrangement
• Contribution rate
• Indexation
• Our experience use all political support for
  solidarity

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Occupational pensions can deliver
Three significant characteristics

• A better balanced system
• Less PAYGO, more fully funded
• Defined benefits
• A considerable degree of solidarity, which means
• Lower cost
• Higher benefits

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Agenda

• Sharing the Dutch experience
• Three significant characteristics
• The key functions of our system

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Solidarity requires trust
The key functions of our system

• Political choice
• How much freedom to fail?
• How much risk to take?
• Independent supervision
• Mindful of risks (solvability) as well as returns
• Well informed, equipped with enough power
• Return guarantees create moral hazard
• Transparency
• Inspiring trust
• Our experience let the system be its own
  guarantee

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Solidarity must be organized
The key functions of our system

• Tackling the free rider problem
• Compulsion is necessary
• Trust is therefore a sine qua non
• The example of the Netherlands
• Company pension funds
• Sector pension funds
• A viable option a national occupational pension
  system
• Escape clause for sectors and enterprises with
  own system

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• Thank you for your attention!