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Saturday 23 June 2018

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CDC schemes returned around 7% over decade in Netherlands

Written by Natalie Tuck
14/03/18

Collective defined contribution (CDC) schemes saw returns of around 7 per cent, or more, over the last decade in the Netherlands, according to APG head of pensions Dr Alwin Oerlemans.

Speaking at a Work and Pensions Committee meeting the UK on CDC schemes, Oerlemans said that he thinks those returns are very hard to get in individual pension schemes.

The current UK government is looking into whether there is any value to introducing CDC schemes in the UK, and Oerlemans was asked to speak about the experience in the Netherlands. He said the high ranking of the Dutch pension system is due to its strength in “adequacy, integrity and sustainability”.

He said contribution levels are an important aspect of the success of the system but noted that it is the risk sharing, which is at the heart of CDC, that is one of the key elements.

“This concerns risk sharing with regard to mortality, longevity risks, but also operational risks concerning the pension delivery, but most of all sharing the risk of investments.

“Collectives, in the Netherlands, really allow an individual to mitigate these risks, for an individual it is very difficult to understand the risk or to be exposed to the volatility of investment risks. This risk sharing of investment risk really helps to mitigate this.”

In addition, he said that a collective approach also helps pension funds to build large diversified investment portfolios, which also enables them to include illiquid investments such as infrastructure.

“It also allows individuals in the fund to get access to the institutional pricing of those portfolios,” he added.

He said risk sharing of CDC schemes has always been a very important part of the system. In the Netherlands the two main types of funds are industry wide funds and corporate funds. In the 2000s after the burst of the dotcom crisis rating agencies and corporates became much more aware of the risks in pension funds, and the risks on their balance sheets, he noted.

He explained that they explored how to mitigate this risk for the corporates but at the same time keep the benefit of the collective risk sharing for the participants, which led to the development of CDC schemes.



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