AMSTERDAM (Reuters) – Millions of Dutch pensioners were spared cuts to their retirement income in 2020 after the government granted pension funds a year’s grace period to restore sagging coverage ratios, although it said future cuts and higher premiums are likely.

The retreat by Mark Rutte’s centrist government had been widely expected, given anger among pensioners and national elections due in 2021. But the decision could hurt the reputation of the Netherlands’ pension system, often rated ‘best in the world’ and framed as an example for other countries.

Social Affairs Minister Wouter Koolmees said he would only force payout cuts next year if funds fall below a 90% coverage ratio. Previously, those with a ratio below 94-95%, including the large ABP and PZFW funds, had been on track to do so.

“I understand the wish not to lower pensions very well,” he wrote in a letter to parliament, adding that “cuts can be necessary in order to maintain support for the system as a whole”, including existing workers and young people set to join.

Dutch pension funds hold a massive 1.5 trillion euros ($1.7 trillion) in assets, including 456 billion euros at the ABP fund for civil servants and 238 billion euros at the PFZW fund for medical workers. Their coverage ratios have been declining for years, despite solid investment returns, as falling interest rates have swollen their future liabilities.

As of Oct. 31, the ABP reported a coverage ratio of 93.2%, while PFZW’s stood at 92.2%, although both will have recovered slightly with November’s interest rate rally and market gains.

Koolmees said the pause would help as pension funds, unions and the government attempt to move to a new system that will emphasize defined contributions and weaken benefit guarantees.

He also repeated that market rates must be used to discount, or calculate, fund liabilities as switching to higher rates, “would mean a large and continuing transfer of pension assets from younger to older generations”.

Koolmees warned that if low interest rates persist, in addition to cuts, premiums will also have to rise sharply.

Unlike in many countries, funds in the Dutch system must use market-derived rates to calculate their future liabilities, rather than rates based on historical investment returns.

Groups opposed to pension cuts have challenged that, arguing that current low and often negative interest rates are exceptional.

But academics and the Dutch Central Bank have mostly endorsed cuts, saying low rates look set to persist.

The Dutch population, as in many countries, is rapidly ageing, with the greatest strain on its pension system not expected until around 2040.

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