AMSTERDAM (Reuters) – When Frans Kolkman hung up his police badge in 2017, he was looking forward to a comfortable retirement. Two years later he’s among millions of Dutch pensioners facing a cut and fearing there may be worse to come.

The planned reductions, due to take effect from January 2020, have shaken a country renowned for having one of the world’s strongest pension systems, and are an early warning to others about the impact of record low interest rates.

Kolkman, who spent 43 years in the police force, hastens to add he will still be well-off but “if I live another 20 years, and there’s cut after cut after cut, then I really don’t know anymore.”

The European Central Bank’s (ECB) stimulus policies, which have helped drive interest rates into negative territory, are blamed in part for the impending cuts in the Netherlands and have triggered a fierce debate over how the funding of pensions should be calculated.

ECB President Mario Draghi said last month that the central bank was “very concerned” about the side effects of negative rates, but maintained they were required for economic growth.

At the heart of the Dutch debate is a technical question over how to calculate the cost of future pension payouts while the ECB helps keep rates low.

Actuaries make assumptions about how long pensioners will live, count up the future payments that have been promised to them and then use an assumed interest rate to “discount” how much must be put away to pay them.

The lower this interest rate, “rekenrente” in Dutch, the more conservative the accounting, and the more it costs to meet future liabilities.

The rekenrente is derived from government bond yields — which have turned negative across Europe as interest rates steadily fell this summer.

Each 1% fall in interest rates has led to roughly a 12% fall in the coverage ratio between assets and liabilities in pension pots, the Dutch central bank says. As a January deadline approaches, cuts appear inevitable.

That has led several funds and some experts to argue that the rekenrente, which is around 0.3%, should be raised instead. Many blame ECB policy and see its effects as temporary.

Increasing the rekenrente to 2% or 3% would restore the funds to full solvency. Corien Wortmann-Kool, the chairwoman of the 456 billion euro ABP civil servants fund, told Reuters she opposes pension cuts as “unnecessary” for now.

“We believe we can achieve good returns, now and in the future,” she said, estimating a 4% return over time is achievable despite low interest rates.

ABP’s coverage ratio first fell through a 95% “critical” level, below which pensions should be cut to ensure a fund has enough assets to meet its liabilities, in July. It fell to 88.6% in August before recovering to 91% in September.

But Dutch Central Bank President Klaas Knot, the country’s top pension regulator, says the rekenrente is “integral” to the system.

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“We will continue to adhere to the risk-free rate of interest,” Knot told journalists this week.

His approach is supported by a group of 10 academics who this week wrote to parliament arguing against a change.

“Imagine you took the risk free rate of return and raised it by 2%. Then the coverage ratio would increase at a typical fund by up to 30%. It sounds too good to be true — and it is. Pensioners get that money paid out now, but the assets pot will be a little more empty each year, and that would go on each year for years,” the letter said.

SIGN OF THE TIMES

One reason the Dutch system is considered so strong is its rigorous accounting. Another is its reliance on several different sources of pensions. Its first tier is the basic state pension that is funded by current workers on the “pay as you go” basis that is the heart of systems in France, Italy and Germany.

The Dutch system relies more heavily than most on a second tier, supplementary employer-run pension funds, the ones preparing cuts. The Dutch fight will be closely watched in the United States and Britain, which have similar tiered systems but funds sometimes use less stringent accounting rules.

Even after the cuts, Dutch workers would still receive more generous pensions than employees in other rich countries. The Organisation for Economic Co-operation and Development (OECD) calculates that Dutch retirees get about as much, all told, as their after-tax income while they were working.

But for Kolkman and other pensioners, cuts estimated at up to 8% next year make no sense, given assets in Dutch pension funds have doubled since 2008 to more than 1.5 trillion euros.

This represents the most of any major industrialized nation as a percentage of GDP, as up to 90% of Dutch workers are enrolled in funds to which they and their employers contribute.

“It’s an amazing amount of money,” said Henk Krol, leader of the 50Plus political party, which represents older voters. “Now the problem is: how much must there be in the pot to pay everyone the share that he or she deserves?”

Krol expects some rule change will ultimately be agreed to avert the cuts, given the prospect of national elections in 2021.

For those running the pensions, however, the reality is that cuts are coming.

“At the current coverage ratio of 92.2% we must cut pensions in 2020,” said Peter Borgdorff, fund director of the 238 billion euro PFZW fund, which covers healthcare workers, on Thursday.

And central bank chief Knot sees no wiggle room.

“It’s not so relevant why rates are so low, what’s relevant is that they are going to stay at this level and then the consequences for the housing market and for pensions must be faced. … We will enforce the rules,” said Knot.

Kolkman knows that he is lucky: his private pension will cover 40% of his “generous” final salary. But he says cuts seem wrong, especially given that Dutch pensions have already not been indexed for inflation for years.

“What gets me is now we’re retired we can’t really fight back. We can’t go on strike. We could demonstrate, I guess, but they aren’t going to lose sleep over that.”

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