It is “inevitable” that the Dutch pensions market will move from its current system of collectivism to an individual pensions saving structure, Pensions Institute director David Blake has warned.
Discussing the ongoing pensions reform debate in the Netherlands, at the recent Longevity 14 conference, Blake described the current Dutch pension system as “the best in the world, in my opinion”.
This view was supported by Prudential Financial senior vice president and head of longevity risk transfer Amy Kessler, who highlighted that the Dutch system was the “finest in the world” for retirement security, with a retirement income replacement ratio of near 100 per cent, compared to the UK's just 25 per cent ratio.
She noted the 'strangeness' of other countries looking to the Netherlands with its collective, risk sharing approach to pension saving, while the Netherlands is in turn looking at individualistic pension savings structures.
“If the Netherlands [pension structure] moved to individualism, risk would have to be reduced and investment timeframes shortened, as the risk is no longer shared out,” she said.
“The last generation in the collective system would have helped the generations above them but then they have no one supporting them,” Kessler added.
According to APG head of ALM Modelling Peter Vlaar, speaking in a personal capacity, the calls for the Dutch system to be reformed have occurred for a number of reasons, including the guarantees being too expensive and the changing labour market, with more flexible working and self-employed, making intergenerational transfers problematic.
He also noted people's lack of trust for the pensions industry. Blake agreed, stating that “in the Netherlands younger people are concerned the collective pensions saving system is like a 'ponzi scheme', with older people taking out more”.
“The Dutch pension system is more about the perception people have than the reality,” Vlaar added.
Suggested reforms include making the accrual rate decline with age, the replacement of guarantees with conditional pension rights, or personal accounts with some element of risk sharing. “However, all these suggestions have risks,” Vlaar warned. For instance, the idea of “individual saving plus a buffer adds complexity and not much else”.
Kessler pointed out that a individual system is “not likely to be as good” as a collective system, but if this shift was to occur, the use of target date funds (TDFs) could help “optimise” the system.
This is because TDFs enables people to know how much they will have in retirement, so that they can plan accordingly, as well as getting a predictable annual income for life with stock market exposure, she explained.
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