Because of the high number of new benefit claimants under the Work and Income (Capacity for Work) Act (WIA), pension funds are facing considerably higher costs for the schemes of incapacitated participants. Funds that reinsure this risk or bear it themselves are both affected.
Data from reinsurer elipsLife and a survey that Pensioen Pro conducted among a number of large sectoral funds confirm this trend.
According to Stefan Duran, Benelux Head of Sales at elipsLife, premiums for pension funds that reinsure the risk of incapacity for work have increased by 20 to 25% over a four-year period. These are mainly funds with a collective defined contribution (CDC) scheme and general pension funds (APFs). Employers that are with a premium pension institution (PPI) and want to insure this risk directly also have to deal with this cost increase.
elipsLife has around sixty pension funds as clients, especially funds with a CDC scheme. elipsLife also reinsures for various APF groups and directly insures the risks of incapacity for work for PPI clients. ‘We work with four of the seven PPIs and serve a total of 35% of the employers’ clients.’
Sectoral funds increase surcharge
Pension funds that bear the incapacity for work risk themselves and finance it through a surcharge on the pension premium were also more expensive. This mostly applies to the larger sectoral funds. At three such funds – ABP, bpfBOUW, and PMT – the increase even exceeded the rise in reinsurance premiums.
At ABP, the average premium as a percentage of the pension basis rose from 0.4% in 2017 to 0.7% in 2021. And the average surcharge increased again to 1% this year. BpfBOUW increased the surcharge from 0.5% in 2018 to 0.85% in 2021, while PMT increased it from 1% to 1.3% in the same period. The last two funds have left the premium unchanged this year.
In 2019, Pensioenfonds Vervoer increased the surcharge from 0.6% to 0.8% and it has remained stable since. PFZW raised the surcharge in 2018 (from 0.5% to 0.7%), but lowered it again in two steps to 0.5%. A PFZW spokesperson states this is because the number of participants who have become incapacitated for work and are entitled to the WIA supplement has decreased.
Many WIA benefits
Duran views the high number of new WIA benefit claimants, which increases the cost of claims for incapacity for work, as the main cause of the higher premiums. Figures from the Employee Insurance Agency (UWV) show that the number of benefits for partial incapacity for work (WGA benefits) has risen from 180,000 in 2017 to almost 230,000 last year. The number of benefits for employees who are 80-100% incapacitated for work (IVA benefits) rose in this same period by almost a third to just under 150,000. According to the January memorandum published earlier this year, the UWV expects a rise in the number of WGA and IVA benefits again this year – by about 7% to over 400,000.
At the end of 2021, the UWV stated that the rise can largely be explained by the increase in the retirement age. Because older employees must carry on working for longer, there is a higher risk of absence through illness. Duran also sees one of the effects of the tight labour market: ‘Many companies and institutions are struggling with staff shortages, which puts extra pressure on employees. That also leads to absenteeism and a possible WIA benefit down the line.’
Michael Pietersen, consultant at Willis Towers Watson, says he recognises the trend. ‘But the picture can differ from fund to fund, just as the odds of incapacity for work also differ from fund to fund.’ Pietersen also sees funds in which issues other than WIA notifications – such as less successful rehabilitation, a delayed review of the previously determined surcharge and unconditional benefit increases – also play a role. Pietersen says he can foresee a need for more premium increases if the high numbers of new benefit claimants becomes a pattern in the coming years and possible COVID effects become clear.
42nd week notification
According to Stefan Duran, the fact that the premium/surcharge increases at funds such as ABP, bpfBOUW, and PMT are higher than the 25% premium increase that elipsLife has implemented could have something to do with a catch-up effect.
Effect of interest
Although the low interest rate also plays a role in the higher premiums because – as with pensions – the value of the obligations increases, Duran states that the effect is limited because of the relatively short duration. ‘The number of people who remain incapacitated for work for life is ultimately much lower than the total number of people who are incapacitated for work. A large proportion of them return to work after a while. ’
Pietersen believes that the low interest rate (and thus higher premium) is not a reason for CDC funds and APFs to decide against reinsurance. ‘Even though the low interest rate affects reinsurers’ prices, if the pension fund keeps it in-house, it also has to deal with the low interest rate when allocating funds to reserves.’
He argues that considering whether to reinsure or bear the incapacity for work risk yourself has not changed materially because of the fall in interest rates. ‘Nonetheless, because of the consolidation trend, funds are larger than they used to be, on average, and their capacity to bear risk has thus generally increased.’
Incapacity for work schemes
In many pension schemes, the incapacity for work part consists of two components. First, participants who have been absent for more than two years and are more than 35% incapacitated for work are entitled to accrue non-contributory benefits. The extent of this accrual depends on the incapacity percentage. In addition, many pension funds pay a supplement on the WGA or IVA benefit. Some funds call this ‘occupational invalidity pension’; other funds call it WIA shortfall and top-up benefits. Together, WGA and IVA form the WIA.
To index or not to index?
Non-contributory accrual and occupational invalidity pension are treated unequally in relation to indexation. Many funds index the pension/supplementary benefit on the basis of the price index. Indexation on the basis of wage increases rarely happens. ‘In the processes I’ve overseen, I’ve yet to come across a fund that has included an increase based on collective labour agreement wages in their incapacity for work risks,’ says Michael Pietersen of WTW. ‘But I was recently involved with a fund that has insured an occupational invalidity pension through a party and the benefit increases annually by a fixed percentage. This was a tailored solution for a large pension fund.’ Stefan Duran of ElipsLife says the non-contributory accrual is not usually indexed. ‘It’s actually an overlooked issue in discussions between social partners. And that does feel unjust in itself. As a participant, you’re stuck indefinitely with the salary you earned at the time of your absence for the purpose of accrual. I would find this worthy of discussion.’
‘These parties are mostly somewhat further removed from developments relating to incapacity for work than we are and thus react later.’ Besides the actual WIA figures, ElipsLife also considers the reports issued under the Eligibility for Permanent Incapacity Benefit (Restrictions) Act when setting premiums. ‘For example, the 42nd and 52nd week reports. Historically, these reports are fairly good predictors of the number of new WIA benefit claimants a year later,’ says Duran. As an example, he mentions those with long COVID, many of whom have returned to work within a year anyway.
Author: Lieuwe Koopmans
