The newspaper headlines are pretty dramatic: the consequences of the coronavirus have a major impact on your pension. Certainly, the situation is serious. But perhaps not as bad as you think when reading the headlines in the newspaper.
The “best” pension system
Few countries in the world have a good pension system as we know it in the Netherlands. It is not without reason that it is often said that the Netherlands has a pension system that ranks among the three best in the world. “Best” because the vast majority of the population builds up assets to have income security after retirement. Together, through pension funds, we have put more than 1.400 billion euros in the piggy bank for “later”. This is also an enormous amount from an international perspective.
Three parts
The Dutch pension building has three floors. To understand the concerns that the coronavirus may have for our retirement, we briefly explain these three floors.
Part 1 – the AOW or State Pension
The basis of our pension is the AOW a.k.a. the first pillar. The AOW is a benefit that almost everyone who works or lives in the Netherlands receives monthly from the government from their AOW age. The AOW is financed by people who are not yet entitled to AOW and who pay tax and social security contributions. This is then immediately paid to people who are entitled to it. We call this a pay-as-you-go system. The amount of the AOW pension is the result of political choices, but is derived from the minimum wage. The effects of the coronavirus therefore have no direct influence on the level of the AOW.
Part 2 – pension scheme via your employer
People working for an employer also accrue pension through the pension scheme that the employer has taken out for its employees. This usually happens with a pension fund. But it is also possible with an insurance company. We call this the second pillar.
Part 3 – your own supplement to your pension
Finally, employees as well as entrepreneurs can build up their own assets as a supplement to their pension. Putting money aside for later can be done in a tax-efficient way. This money is then used to receive benefits after the retirement date. Taxes will have to be paid on those payments later or later. But that is often in a lower tax bracket. That makes this way of wealth accumulation extra interesting.
Corona’s effect on financial markets
Pension funds
Pension funds invest their equity. As a result of the corona virus, economies locally and worldwide are under severe pressure. And the stock exchanges have suffered significant losses in the past period. Fortunately, stock markets have partly recovered with the help of various government support packages. These developments naturally have consequences for the financial position of pension funds. Pension funds are legally obliged to apply a discount to existing and new pension benefits if their total reserves are insufficient to make future benefits. That is precisely why the media report on this development. The corona virus can therefore have unpleasant consequences for this part of the pension building! The next reference date for a possible discount is the end of December 2020. In the meantime, much can change.
More certainty in “own” pension accrual
We have described the pension system above as a building consisting of three parts. The third part consists of the scheme that someone has taken out directly with an insurance company. In that case there are two situations:
· You are not yet entitled to a pension
You are still building wealth. In that case, you may also experience falling prices affecting part of your accrued capital. But the difference with the pension funds is that the remainder of this capital simply remains. No pensions for pensioners have to be paid from the pension fund. So your assets can start to grow again when the share prices rise again. A drop in value now does not therefore automatically mean that you will receive a lower pension benefit in the long term. Pension investing is and remains a long-term matter.
· You have reached retirement age
If you have reached retirement age, you have often already made an appointment with the insurer about the amount of your pension benefit. At that time, the insurer is bound by this amount. The risk of negative stock market developments as a result of the corona virus will then be for the account and risk of the insurer
Contact us if you have any questions?
We fully understand that for many people, retirement is a difficult subject. And there are even more pension options. We have tried to outline the big picture here. Do you have any questions? Please contact us. As your financial adviser we are there to answer any questions you may have and to look with you for solutions best fitting your personal situation.