Opaque Dutch pension system shifting towards DC – CPB
16 Nov 2012
NETHERLANDS – The Dutch pension system will transition to a defined contribution system within five years if the industry is unable to improve transparency of pension rights, the deputy director of the Bureau for Economic Policy Analysis (CPB) has said.
Asked outright at the WorldPensionSummit in Amsterdam why the Netherlands had not shifted to personal accounts, Casper van Ewijk acknowledged that the debate to reform the pension system in such a manner had been ongoing for some time.
Van Ewijk, also a professor of economics at the University of Amsterdam, noted that the current system still allowed for risk sharing.
"If you have a DB system, you can smooth over a longer period than individual accounts," he said.
Noting the absence of longevity bonds that would be helpful in such a process, he added: "And also, in individual accounts, you can do it [only] with the market instruments."
However, he conceded that the country's pension industry faced the challenge of introducing transparency to pension rights at a time of system-wide underfunding and repeated rights cuts to restore individual funds coverage ratio to the minimum level of 104.5%.
"If they can't make it transparent in the next five years, we will have individual accounts – individual accounts in a collective manner," he said.
In his talk on the macroeconomic consequences of pension supervision, Van Ewijk also argued that contribution increases should in future be used sparingly to improve the financial health of underfunded pension systems, noting that the recent Pensions Agreement seemed to accept the necessity of other measures.
Speaking before van Ewijk took to the floor, Roel Beetsma, chair of the Department of Economics and Econometrics at the University of Amsterdam, cited research that, according to him, showed the detrimental impact such contribution increases had on the Dutch economy.
Average contributions have almost doubled over the past decade.
Beetsma also noted the potential impact of individual funds needing to switch out of equity markets into bonds to improve their funding position.
He noted that such policies would have a "very substantial" impact on stock markets and bond prices, acknowledging that the overall impact would depend on the size of a country's pension system compared with its economy and home bias.
"If the pension sector is big and mostly invests in domestic stocks, then those effects will be big," he said.
"If the pension sector is perfectly diversified, invests in other countries, then the effects of the policies will to some extent leak away."
Author: Jonathan Williams