Actual results may vary

On Friday 10 June, the Dutch government, together with employer and employee representatives, signed a comprehensive agreement to drastically reform the Dutch pension system.

The solvency rate of pension funds will reflect market expectations. Instead of applying a risk-free rate to discount liabilities, as is the case for ‘old style’ pension arrangements, the new discount rate will be based on long-term average expected returns.

Employer contributions will be capped at the current level, recognising the widely held belief that contributions have reached their upper limit. With a premium cap in place and considering the prospect of a rapidly ageing population, it makes sense that financial market returns become the single most important determinant of pension results. As any investor knows, outcomes are unpredictable - and so it stands to reason that second pillar benefits under the new agreement will vary as well.

But not without a generous amount of smoothing and collective risk sharing: the pain of financial setbacks - or the gains of winning streaks, as the case may be - are to be spread out over a time period of a maximum 10 years. And funds will continue to operate as a collective. without distinguishing between generations, much less individual pension savers.

In fact, with this agreement the Dutch system formalises its transformation from defined benefit to the Dutch version of defined contribution: collective DC.

When and how this transformation will be completed remains to be seen, however. It is as yet unclear how existing pension rights, accrued in a system of nominal guarantees, can be subjected to the new no-guarantee regime. What’s more, the largest Dutch trade union, FNV Bondgenoten, with nearly half a million members, is dead set against the new deal and determined to fight for more guarantees.

At the same time, the new pension deal is drawing fire from critics worried that a discounting method based on expected investment returns, however prudent, amounts to creative accounting. While their opposite numbers, equally worried, warn that pension funds may actually be tempted to derisk more than they should.

To add madness to chaos, the new pension deal - although signed with a flourish and presented with much ado - doesn’t actually prescribe anything to anyone. All the pertinent details are to be determined on the individual scheme level.

And although the Dutch cabinet and social partners both strongly endorse ‘new deal’ pension arrangements, Labour minister Henk Kamp makes a point of adding that “of course, the existing arrangement will remain possible as well”. For now, it seems, anything goes. Actual results may vary.


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