Brans Brief number 7, year 8, July 2005

In this issue of the Brans Brief:
 

	Maastricht court ruling: breadwinner’s offset is not discriminatory
	WIA implementation and financing
	Asset/liability index

Maastricht court ruling: breadwinner’s offset is not discriminatory

On 6 July 2005, the Maastricht court ruled that the ABP’s use of the breadwinner’s offset does not constitute sexual discrimination. This court ruling goes against the view of the Equal Treatment Commission (Commissie Gelijke Behandeling, CGB) (referred to below as 'the CGB') dated 30 March 2004 (ruling no. 2004-30), in which the CGB held that the breadwinner’s offset used by the ABP resulted in an unlawful distinction between men and women (see Brans Brief, April 2004).

The Maastricht court took the view that there is no legislation or regulation that stipulates that the old age pension, including the AOW benefit (state pension), has to equal 70% of final salary. The difference in retirement income between breadwinners and double-income couples arises from the fact that both the occupational pension and the state pension are taken into account in the comparison. However, the state pension is deemed to fall outside the scope of the term ‘pay’ as defined by European case law. What matters is that the ‘pay’ (for which read: supplementary pension) for men and women is equal. This is beyond dispute in this case, which means that there is no question of discrimination by the pension fund or the employer. The court also issued a related ruling that a partner’s state pension cannot be allocated to the participant and cannot be counted as part of his or her ‘pay’. All in all, a clear and logical ruling.

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WIA implementation and financing

The Lower House of the Dutch Parliament recently approved the Employment and Income according to Capacity for Work Act (Wet Werk en inkomen naar arbeidsvermogen, WIA) and the related WIA Implementation and Financing Act (Implementation Act) (Wet invoering en financiering WIA (Invoeringswet). Both Bills still have to be approved by the Upper House. The WIA itself is discussed in the April 2005 edition of the Brans Brief. Additional information on the way in which the WIA will probably be implemented and financed is given below.

Implementation
The WIA consists of two sets of Regulations, namely the IVA (Income Provision for the Fully Occupationally Disabled) for those with complete and permanent occupational disability, and the WGA (Work Resumption for the Partially Occupationally Disabled) for those with partial occupational disability.
With regard to the implementation of the WGA, employers can place the financial risk of partial occupational disability with the UWV (Employee Insurance Implementation Body) or bear this risk themselves (and insure the risk with a private insurer if need be). Existing employers who are self-insured for the purposes of the Employment Disability Insurance Act (Wet op de arbeidsongeschiktheidsverzekering, WAO) (referred to below as 'the WAO') and large-scale employers (more than 25 times the average total wage and salary bill) will be able to do this as early as 2006, with small-scale employers being given the same options from 2007. An employer who is self-insured for WGA purposes will bear the WGA benefits costs and during that period will be responsible for reintegration. The WGA self-insurance period has been set at 4 years for 2006. The duration of this period from 2007 will be set in 2006.
In any case, the IVA is to be implemented by the UWV during 2006 and 2007. If the Pemba (Invalidity Insurance (Differentiation in Contribution and Market Forces) Act) is not abolished in mid-2007, employers will also be allowed to bear the financial risk of complete and permanent occupational disability themselves from 2008 onwards (a move that may involve private insurance) but only if they are also self-insured for WAO purposes. The duration of the IVA self-insurance period will be 4 years.

Financing
In principle, the WIA benefits will be provided by the UWV, with the UWV claiming the costs attributable to the self-insured employers from them.
From 2007 onwards, the costs of the WGA will be funded by a basic contribution and a differentiated contribution. The WGA costs will be covered by the differentiated contribution for a period of time that is still to be decided. The WGA benefits that are paid for longer than the period still to be decided will be funded by the basic contribution. The self-insured employers will bear the cost of the WGA benefits for the period that is still to be decided and will not have to pay the differentiated WGA contribution. The implementation procedure chosen means that for the transitional year of 2006 the WGA benefits will be financed by a basic contribution that will be the same for all employers. During 2006, the self-insured employers will also be helping to pay for the costs of the WGA (via the basic contribution), which is why part of the basic contribution will be refunded to them in 2007. All employers will be allowed to recoup a maximum of 50% of the WGA costs from their employees.
The planned financing system for the IVA will be implemented in 2008. During the transitional years of 2006 and 2007, the IVA will be financed from the national uniform basic contribution for the Invalidity Insurance Fund (Arbeidsongeschiktheidsfonds, Aof) that is levied on all employers.
From 2008 onwards, a system of differentiated contributions will be implemented for the IVA too, unless the decision is taken in mid-2007 to abolish the Pemba.

Level playing field
Private insurers are obliged to put a system of full prefunding in place, which means that from the commencement of the insurance policy they have to reserve capital to cover long-term liabilities and must pass these costs on in their premiums. Since the UWV uses a pay-as-you-go system that removes the need for such a buffer, it can in theory charge lower premiums. In other words, the different financing system used could make a private insurer a more expensive provider of insurance against the risk of occupational disability than the UWV. In order to ensure fair competition between the UWV and the insurers, from 2007 onwards those employers who are insured with the UWV will pay a surcharge on top of their WGA contribution, for which surcharge they will receive macro-economic compensation.
The only way to arrange an appropriate system of compensation for the surcharge on the WGA contribution for the Work Resumption Fund (Werkhervattingskas, Whk) is to grant a rebate on the Aof contribution. Those employers who are insured with the UWV will pay the surcharge levied on the Whk contribution. These additional costs will be offset by a rebate on the Aof contribution. Employers who are self-insured privately will incur higher costs as a result of the private insurer’s terminal funding but will at the same time also be granted a rebate on the Aof contribution. Although self-insured employers who are not privately insured will pay neither a Whk contribution nor for terminal funding, they will still have to make a provision, so will also be granted a rebate on their Aof contribution.

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Asset/liability index

The asset/liability index is a rough measure of movements in a pension fund’s asset/liability ratio, in so far as they are directly explainable by such general factors as stock exchange prices, interest rates and inflation, i.e. disregarding derivatives and recovery measures. The initial value of 1 as at year-end 1998 was chosen at random. Remember that the index only measures the movements over time and that the actual values of the asset/liability index have no other significance. In other words, the asset/liability index is a little different to the asset/liability ratio. Example: let’s say that at year-end 2000 a fund has an asset/liability ratio of 130% based on index-linked liabilities. At that time the relevant asset/liability index was 1.256, whereas in mid-2005 it was 0.777. It follows that the estimated asset/liability ratio as at that date is 0.777 ¸ 1.256 × 130% = 80%.

The investment mix used in this example is 50% shares (MSCI global index) and 50% bonds (5-year duration). Further information can be found in the Brans Brief for June 2004.

(a) Index-linked pensions

(b) Nominal pensions

(c) Additional information

(*) The actuarial interest rate in percent is the average discount rate for the pension liabilities, weighted as far as possible according to durations and pension amounts. In this example, the average duration is 15 years, based on nominal liabilities.

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