The Netherlands is one of the few countries in Europe that has a substantial amount of pension assets in the various funded schemes. Still there is a substantial dependence on a relatively generous pay-as-you-go state pension system which will become a problem at some point. But at least the situation isn't as bad as it is in France or Germany. But while capital-funded pension systems at least try to address the issue, they are not without risk. Investment risks tend to average out over the long term, but in the short term pension funds are exposed to the vagaries of the markets.

We're now witnessing the biggest bear market since the 1930's. The current downturn in equities has been longer and deeper than the big bear of 1973-74, and pension funds around the world have been suffering as a result. The biggest Dutch pension fund ABP has just announced that its funding ratio fell below 100% last year. With around $140 billion in assets, the ABP is one of the largest pension funds in the world. (CalPERS used to be the biggest, but has fallen back to just $131 billion in assets.) Getting back to a fully funded status is going to require large premium increases for the participants. Premiums may have to rise by 25% in the coming year in order to regain a 100% funding level. The funding level is the ratio of present values of assets to liabilities of the pension fund. So an underfunded status of 99% is nothing to panic about as it is not causing a cash flow problem. Rather it means that if the fund were closed today (no more contributions, no more building of pension rights but still paying out the built-up rights) the assets would not cover all the liabilities. You do need to fix the underfunding, but that is something that can be done over the course of a few years. The short-term increase in premiums that the active members of the fund will have to pay remain painful nonetheless.

There is no magic bullet in creating old-age provisions. A capital funded pension system is still the best alternative there is because you actually do build up capital as you go along. The downside risk is that things will fall apart and that we'll get a worldwide economic collapse. But if that happens, a state-run pay-as-you-go system isn't going to be better off either.