Leading pension academics in the Netherlands have come up with a unified proposal for pension reform, aiming to bolster individual ownership rights yet preserve benefits of collective risk sharing, according to IPE’s sister publication Pensioen Pro.
The proposal provides for clear individual ownership rights, combined with the protection of collective risk sharing.
And because pension funds would no longer have to adhere to the nominal funding rate, schemes would be at liberty to offer tailored solutions matching the needs of their participants.
The academics – including internationally renowned pension thinkers from the Dutch regulator, a political activist and representatives of APG and PGGM – represent wildly diverging views and are frequently and publicly at odds on anything to do with pensions.
Rallying to the call of the think tank Netspar, they have drafted a compromise and have now entered their combined proposal as part of the ‘national pensions dialogue’ organised by the Department of Social Affairs and Labour.
The proposed new system features individual retirement accounts, while maintaining collective buffers – although not all of the report’s authors fully agreed on their use.
The guarantees that are typical of defined benefit arrangements are replaced by transparent information regarding the pension benefits that participants might expect – without the guarantees.
Individual retirement accounts would show each individual’s savings, including contributions and investment returns.
The individual accounts would also reflect any insurance premiums paid, such as disability insurance.
Collective capital buffers would offer protection from market shocks.
The buffers would be funded during times of high investment returns, while participants would receive payments from the collective during times of negative investment returns.
Participants would replenish depleted buffers over time through ‘recovery contributions’, allowing shocks to be spread over generations.
Other collective features would be retained, including investing and benefits administration collectively to cut costs, but also the option for pension funds to decide which risks should be shared among participants.
Macro longevity risks and inflation risks might be shared, for instance, and, in extraordinary circumstances, pension fund trustee boards may be grated the authority to effect a wealth transfer.
The introduction of individual retirement accounts would in any case make absolutely transparent exactly how much these forms of solidarity would cost any individual participant.
Contribution levels would remain constant throughout a participant’s lifetime, while investments are to be tailored according to lifecycle principles, with the important option to continue allocating to risk-bearing investments after retirement.
Investments would be organised collectively for benefits of scale, but allowing for some individual choice, particularly with regards to risk profile.
Because pension funds are no longer bound by the need to maintain a set nominal funding rate, schemes would be able to cater to their participants’ investment needs.
However, schemes would work toward a target benefit level.
Premium contribution levels would take expected returns into account.
Participants would be offered a choice in terms of benefits – receiving higher benefits initially and then tapering off, for instance.
During the payout phase, participants may buy annuities from the fund, while the fund itself invests to fund these annuities.
As the scheme remains invested in equities, the risk level will be a bit higher, so annuities are not 100% guaranteed.
Alternatively, participants may choose to pay out their own benefits from their individual account.
If they should die prematurely, their savings account will be absorbed by the collective, which uses the money to fund benefits for those who live longer than expected.
The academics have published their proposal ahead of a nationwide review of the existing pensions system.