Dutch pension reform transfers risk to individuals, expert warns

The upcoming Dutch pension reform, which will see every defined benefit scheme become a DC-like collective scheme, transfers the risks of the system to individuals, AXA Investment Managers head of quant lab, Laurent Clavel, has warned.

Speaking at a webinar on the impact of the reforms, yesterday 30 June, Clavel said that although it is a “good solution” to improve the current pension system in the Netherlands, the risks are being passed to individuals.

“Although I am presenting it as a good solution… you have to be mindful that the risk is not gone. You have transferred the risk from the state, eventually, and the regulation, to the people, to the pensioners, because you are no longer guaranteeing anything.”

He warned that following similar reforms in Sweden, some pensioners complained because the pension was not as high as they anticipated.

However, trade union CNV board member, Patrick Fey, who has been involved as a social partner in the negotiations with the government and pension funds believes the new system has something good in it for every generation.

The reforms have taken 10 years to negotiate and Fey said there has been a lot of discontent among citizens towards pensions. This is due to the young feeling like they are paying for the old and current pensioners unhappy with the lack of increases to their payments, which was the “main driver” for wanting to change the system.

Under the new rules every pension scheme will change to a DC-based system, although this will be more like collective DC, by 2026.

“In the old system, the young people paid for the old, you could say. In the old system the premium for young people is more than [what it was for] older people, but they would get equal amounts. In the new system, younger people get more, as the length of investment is much longer, which is a crucial change.

“It will help to increase support from young people to keep the mandatory pension system alive. For older people the chance of a raise when the economy is good will become better. For every generation there is something good in it,” he said.

Despite this, Fey acknowledged that the success of the pension system will be based on the contributions and investment returns: “We have to pay a premium in the long run, which has to be high enough and we have to have a sound investment policy. Those too together determine the quality of the pension.”

This Saturday, 4 July, will see an “important vote” on the reforms, Fey said, then next week there will be a discussion on the reforms in parliament. However, the six political parties support the reforms. The next 18 months will see the introduction of new laws and regulation, before pension funds start adapting to the new system, with a completion deadline of 2026.

Clavel, noted that, similarly to the Nordics, the role of the social partners will be to make the investment and longevity decisions on behalf of the individuals. He explained that the Dutch reform will see pension funds move away from a DB investment design which “constantly refers to funding ratio, the matching between asset and liability… a lot of risk free and a lot of very long low interest rate products”.

They will now move to a DC-like collective product design used in Sweden, France and Belgium, which will see them “adding up individual target-date solutions with quantified risk profiles”.

AXA Investment Manager country manager for the Netherlands, Hanneke Veringa, believes the reforms will lead to €500bn of assets transferred from liability driven investments to cash flow driven investments.

Veringa, said the reform is going to have a “profound impact” on the asset allocation of pension funds in the Netherlands and, more widely, the fixed-income market in Europe.

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