Falling savings interest rate: case of the Netherlands
After its 2009 free fall and a limited recovery in 2010 and 2011, there has been a continuous decline in saving interests at Dutch banks since 2012. Since 2016 the first private savers in Germany have to pay a penalty rate, the question and fear now are: will the Netherlands follow? Why do saving interest rates keep on dropping?
The saving interest has always been an intrinsic part of the bank’s business model. Banks turn the consumer and business savings into investments and credit grants. From this banks make a profit, and traditionally reward this with interests on savings, this to motivate savers to deposit money with the banks. This ancient mechanism, however, is now under pressure because banks have not been able to lend out the money of savers well, for several years.
The credit and euro crises afflicted the economies globally which did have serious repercussions for them. Consumers and businesses have suffered, also in the Netherlands. Due to the moderate confidence among consumers and companies, the global economy slowed down, resulting in lower inflation globally. In turn, this close to zero inflation reduces the various interests such as the interests on savings considerably. Western economies show a limited growth again, but consumers and businesses are not confident, which also reflects in the private individuals’ reticence about the investment markets.
The policy of the European Central Bank (ECB)
In recent years, after the credit and euro crises, the ECB has implemented a series of necessary measures geared to restore confidence among banks, businesses, and consumers. On the downside, however, these have eroded the interests on savings.
Loans to banks
The credit crunch in 2008 and 2009 also caused a lack of confidence among banks resulting in reduced interbank lending. Therefore, the ECB took on this role and provided loans to banks directly. Thanks to these loans parked at the ECB, there is an extended liquidity surplus in the banking market for quite some time now. Banks must refrain from investments in the weakened economy.
Introduction negative deposit rate
Since mid-2014 the ECB has carried a negative depositor’s interest and all banks, part of the European Monetary Union (EMU), have to pay for the parking of their respective deposits. This because the ECB continues to persuade the banks to invest their money in different markets. EU economies have not fully recovered yet, in that context the ECB would like investment banks to support the slight recovery the markets are currently showing.
Negative interest ‘passed’ on to saver
Banks pass on ‘charges payable’ related to the negative interest of the ECB by reducing interest to the saving accounts. Up till now, with Dutch banks the interest rate is just above zero, however, for some German banks, a penalty interest rate already applies. Banks claim that the negative deposit interest rate at the ECB does affect their profitability. Hence they have no choice but to lower their interest rates for clientele owned accounts.
Observation: Dutch bank’s profit margin not (yet) shrinking
Although the lack of funding needs at the enterprise level and the negative deposit interest rates put pressure on the revenue model of banks, the six-months 2016 figures show that all Dutch banks have sufficient margin to manoeuvre and organise their business model in a different and equally effective way. ING, ABN AMRO and smaller banks were even able to increase their interest margins. Rabobank stabilised its interest margin, only SNS’ interest margin showed some weakening.
Research by the American National Bureau of Economic Research shows: since the 90s, the real interest rate (the interest rate minus the inflation rate) has been falling worldwide. In October 2016, a study by Professor Coen Teulings from the British University of Cambridge revealed that this trend from the 90s has its origins in the baby boom combined with the introduction of the pill.
After a sharp rise in the birth rate after World War II, the introduction of the pill in welfare states almost halved the birth rate, well below pre-World War II level. A sharp dip in the demographic structure of populations in countries like the Netherlands and Germany occurred: a relatively large group of ageing citizens approaching retirement age and therefore relatively saving a lot and consuming little. Their capitals remain parked in pension funds and savings accounts, long-term. On the other hand, a relatively small part of the population spends money. The age structure has had a larger impact on interest savings than the ECB’s policy, Teulings claims.
Pension system heavily squeezed
The demographic structure of the Netherlands also affects the way the younger generations save for their retirement. In 2016 the revenues of pension contributions are paid for by ever fewer workers. In that light, this group should potentially make additional savings to secure its retirement. According to the Dutch think-tank Netspar*, around 35% of the Dutch households save too little to meet their retirement wishes. In particular, the self-employed and divorced men and women run short.
Spiral of destabilisation caused by age structure and market conditions
Furthermore, pension funds have to deal with the ECB’s interest rate policy. The lower the rate, the more money they must maintain to fulfill their pension obligations to the participants. Pension funds are struggling to achieve satisfactory returns on the investment markets.
Raising legal retirement age
Increasing life expectancy makes the funding of the Dutch general old age pensions act AOW more expensive to the government. By 2018, the Dutch government will make a first ‘adjustment’ to this enhanced ageing population by raising the retirement age to 66. In 2021, the retirement age will rise to 67, followed by 67 and three months in 2022. From 2023 onward, the state pension age will be linked to life expectancy. According to the Dutch Central Agency for Statistics, CBS, the state pension age is expected to be 71.5 in 2060.
Those insisting on retiring when they turn 65 need more savings. A study by the Dutch insurer Delta Lloyd shows that the gap between when employees who would like to and those who need to retire is increasing. The desired retirement age has dropped to the age of 63.9. Young people even want to stop working at the age of 62.8.
According to a study conducted by economists at the Bank of England and published in August 2016, there were three additional causes for the decline in real interest rates during the 90s. First, the growing income gap among citizens of the world: the rise in the number of very wealthy citizens leads to the growth of savers with higher savings, the so-called super-savers. Because banks have a savings surplus, payment of interest on savings to this group weighs heavily. In Germany, some banks have introduced negative interest rates for super-savers.
Integration of financial markets
A second cause mentioned by the researchers is the increasing integration of financial markets with established financial sectors in emerging markets. In emerging markets, there is also talk of a savings surplus. This savings surplus causes additional pressure on the interest rates due to the increased connectedness with established economies.
Decrease in price capital goods
Until the millennium turn and finally because of falling interest rates by the continued global downturn of capital goods pricing, the price companies need to manufacture their products and services. First, and directly related to the transfer of work to low-wage countries, the prices of machinery and means of transportation dropped. Automation is another reason: this made established economies less a production and more a knowledge and service economy.
Through automation and outsourcing, the productivity of companies in established economies grows faster than the growth of real income. Socially the need to save for the retirement income increases, resulting in dropping interest rates.
*Netspar, Network for Studies on Pensions, Aging and Retirement, is a ‘think tank’ and knowledge network. Netspar is dedicated to promoting a wider understanding of the economic and social implications of pensions, aging and retirement in the Netherlands and Europe.