What The Netherlands can teach Rhode Island about pensionsFebruary 4th, 2013 at 3:07 pm by Ted Nesi under Nesi's Notes, On the Main Site
The idea sounds outlandish, considering Treasurer Raimondo was harshly condemned in 2011 when she got the rate lowered from 8.25% to 7.5%. But before you scoff at the idea, read this new Institutional Investor article about the raging debate over discount rates. An excerpt:
The Netherlands, which runs one of the world’s most rigorous and best-funded retirement systems, requires that pension plans discount their future liabilities using not their hoped-for rate of investment returns but a conservative benchmark tied to long-term interest rates. … The executives can only imagine what it would be like to operate under U.S. rules — if they used Indiana’s [6.75%] discount rate, ABP could claim to be nearly 200 percent funded.
[ ... ]
By the last quarter of 2011, when the discount rate stood at 2.74 percent, ABP’s funding ratio had recovered to 93.7 percent, well below the 105 percent level required by law. ABP responded by cutting pensioners’ monthly payments by half a percentage point and raising employer and employee contributions, which already stood at more than 20 percent.
This is a good reminder that partisanship can make it harder to analyze policy. In the U.S., the push to lower discount rates for public pensions is usually associated with conservatives, many of whom are also antagonistic toward the unionized public employees who will eventually receive the pensions. Yet The Netherlands isn’t exactly a conservative country by American standards.
What’s interesting about the Dutch approach to pensions is that it’s dynamic, adjusting benefit and contribution levels based on the financial health of the fund. It’s easy to imagine how this could cause problems – would benefits have been slashed immediately after a market meltdown like the one in late 2008? On the other hand, this would ensure the pension fund isn’t paying out significantly more than it can sustain, and creates incentives for everyone involved to push for a healthy funding level.
And speaking of pensions, don’t miss the big investigation Tim White and I have coming tonight about one of the worst-funded local pension plans in the state. It’s pretty shocking and raises serious questions. The story airs at 10 on Fox Providence and 11 on WPRI 12, with the more detailed Web story also going online tonight.
• Related: Going Dutch? Netherlands uses Raimondo-like COLA formula (Nov. 3)
(photo: Bed & Breakfast World)