What makes US re­tire­ment sys­tem bad ex­am­ple

The Pak Banker - - OPINION - Justin Fox

The head­line from the Dutch busi­ness news­pa­per Het Fi­nan­cieele Dag­blad caught my eye on Twit­ter a few weeks ago: "Amer­ica is the ex­am­ple of how not to do pen­sions." 1 The quote was from an in­ter­view with An­gelien Kemna, who stepped down on Nov. 1 from the top fi­nance job at APG Groep NV, which man­ages the Nether­lands' big­gest (and world's fifth-big­gest) pen­sion fund. Af­ter read­ing it, it struck me that it might be use­ful to let U.S. read­ers know what one of the lead­ing fig­ures on the global pen­sion scene thought was wrong with the way this coun­try han­dles re­tire­ment sav­ings.

The Dutch re­tire­ment sav­ings sys­tem, con­sid­ered one of the world's best, is built around de­fined-ben­e­fit work­place pen­sions -- as the U.S. sys­tem used to be. But while some pen­sion funds are af­fil­i­ated with a sin­gle com­pany, such as Royal Dutch Shell PLC or Konin­kli­jke Philips NV, in­dus­try-wide pen­sion ar­range­ments are the norm. APG man­ages ABP, the 405 bil­lion-euro pen­sion fund for work­ers in the pub­lic sec­tor and ed­u­ca­tion, and sev­eral smaller funds.

Be­fore join­ing APG as chief in­vest­ment of­fi­cer in 2009 (she was pro­moted to chief fi­nance and risk of­fi­cer in 2014), Kemna was chief ex­ec­u­tive of­fi­cer of ING In­vest­ment Man­age­ment Europe and worked in var­i­ous jobs at Dutch as­set man­ager Robeco Groep NV. From 2007 to 2009, she taught part time at Eras­mus Univer­sity Rot­ter­dam, where she got her Ph.D. in fi­nance, while liv­ing in At­lanta, where she got some first­hand ex­pe­ri­ence of how the U.S. han­dles re­tire­ment. I spoke with Kemna by phone in midDe­cem­ber. What fol­lows is an abridged and edited tran­script of our con­ver­sa­tion.

An­gelien Kemna: What I saw liv­ing in the United States was that so many peo­ple not only lost their jobs and houses dur­ing the fi­nan­cial cri­sis, they also lost more than half of their pen­sions, be­cause their pen­sions were 401(k)s. These are in­di­vid­u­al­ized pen­sions with high fees. Peo­ple don't un­der­stand the risks they take, they do not share risks over gen­er­a­tions. It makes them ex­tremely vul­ner­a­ble in an area that is very im­por­tant for them -- their fu­ture life and safe­guard­ing their fu­ture life.

I think that fi­nan­cial ser­vices or­ga­ni­za­tions made a lot of money sell­ing these things. Peo­ple have ex­treme dif­fi­culty un­der­stand­ing pen­sions at all, and it's very easy to con­vince them to do things that might ac­tu­ally not be good for them.

That is some­thing that I have been fight­ing against my whole life in the Nether­lands, the shift to an in­di­vid­ual sys­tem. You can top up in­di­vid­u­ally if you want to, but the ba­sis pen­sion should be risk shar­ing be­tween peo­ple of var­i­ous ages.

JF: One thing that seems un­der-un­der­stood here is that it's not just the com­pe­tence is­sue of whether in­di­vid­u­als are good at in­vest­ing for re­tire­ment, it's that in the­ory -- and I think in prac­tice in the Nether­lands -- it's cheaper to do it col­lec­tively, right?

AK: Oh, ab­so­lutely. And yes, we also suf­fered from the cri­sis as pen­sion funds, but de min­imis. We've to­tally re­cov­ered from the cri­sis, and I would say that the sys­tem has been shown to be pretty ro­bust un­der mar­ket crises. Our sys­tem is less ro­bust un­der longevity risk.

JF: That's ev­ery pen­sion sys­tem in the world. I was just reread­ing a Bloomberg View piece by Sat­jayit Das on Aus­tralia's pen­sion sys­tem, which is pretty highly ac­claimed. The gist of his ar­gu­ment was that maybe none of these pen­sion sys­tems can ac­tu­ally work with the way pop­u­la­tions are de­vel­op­ing in wealthy coun­tries, with peo­ple liv­ing a long time and also rel­a­tively low growth in the work­ing-age pop­u­la­tion.

AK: Yes, ex­actly. I think none of the pen­sion fund sys­tems are ro­bust enough against that. But in our sys­tem, we can cut off some at the top. We did that a cou­ple of years ago where you don't get all these ben­e­fits from pen­sions and taxes if you make more than 100,000 euros a year as re­mu­ner- ation, and we could lower that. If you don't have to take the top, top, top salaries, that makes the pen­sion sys­tem as a whole more af­ford­able and more solid, more ro­bust.

There are some ways to over­come the neg­a­tives of our cur­rent sys­tem. But what will cer­tainly not over­come the neg­a­tives is to go in­di­vid­ual and to be ba­si­cally very un­pro­tected.

JF: In the U.S., the place where there are still de­fined-ben­e­fit pen­sions is mostly with state gov­ern­ments, and there's lots of pres­sure po­lit­i­cally for the states to go in­di­vid­ual, in part be­cause they've done a pretty poor job in gen­eral of set­ting aside enough money. It seems like the Dutch and a few other North­ern Euro­pean coun­tries have this unique mix of a sense of "We're in this to­gether," but at the same time a re­ally hard-nosed ac­count­ing tra­di­tion. That's hard to repli­cate.

AK: Yes, the ma­jor­ity of the state de­fined­ben­e­fit sys­tems in the U.S., if they would have to ap­ply our reg­u­la­tory rules, they would be se­ri­ously un­der­funded. It's very hard to in­vest your way out of that, so they do need to do some­thing.

If you go in­di­vid­ual, that's easy. You just let go of your re­spon­si­bil­ity. But ba­si­cally you're not only vul­ner­a­ble for longevity risk, you're also vul­ner­a­ble for mar­ket risk, much more than in a risk-shar­ing ar­range­ment.

AK: It takes us for­ever, but over the years, con­tin­u­ously, ad­just­ments have been made so that our pen­sion sys­tem would stay af­ford­able. We went from a pen­sion based on your last earned in­come to pen­sions based on av­er­age in­come over your life­time. That's a huge dif­fer­ence, but it went pretty smoothly. Now we're not giv­ing ex­tra pen­sion if your in­come is above 100,000 euros, and that also went pretty smoothly. So it's not easy, but be­ing able to have some flex­i­bil­ity is nec­es­sary.

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