The twain shall meet
The figures speak for themselves when it comes to the development of defined contribution (DC) pension assets. Defined benefit (DB) pensions accounted for over 60% of the total assets in Towers Watson’s annual Global Pension Asset Study 10 years ago but that share is now 53% and falling; the annual growth of DC assets was 8.8% over the past 10 years compared with 5% for DB assets.
Against this backdrop, the Netherlands, Canada and Japan seem to be something of a hold-out against a global trend, since each has over 95% of its pension assets in DB funds. Indeed, the Netherlands is perhaps the country with the greatest national commitment to retaining the solidarity of defined benefit pensions.
But this commitment is now expressed in the various iterations of the proposed new financial assessment framework (FTK) in a process that is becoming increasingly arcane. The government initially targeted a dual FTK that would accommodate both a nominal and a real pension promise, but the technicalities of that exercise proved too challenging, not least due to the legal ramifications of importing old entitlements to a new framework.
So, after years of delay, the government announced in October 2013 that the FTK would now accommodate only one form of contract. A proposal was still awaited at the time of writing and implementation has slipped to 2015.
The principle of Dutch pension solidarity has not always been easy to defend, particularly against the backdrop of the mandatory benefit cuts that have been imposed on funds in recent years. Ironically, although their aim has been to secure the long-term health of the DB system, these cuts have done the most to undermine it, both by imposing an element of conditionality and by eroding trust in the system overall.
One of the hallmarks of Dutch pension solidarity has been the requirement for a single fund to cover all risk profiles. A compelling new proposal would put an end to that principle but might also represent the best way to unite the sometimes contradictory imperatives of the Dutch system.
Rather than a complex FTK, Theo Kocken, CEO of Cardano and a highly respected pensions commentator, argues in this issue for a separate DC accumulation fund for younger members to sit alongside the existing fund, which would become a decumulation or annuity fund over time. Kocken believes younger members’ contributions should be channelled into the accumulation fund. As they get older, they would exchange their units in that fund for risk-free annuities through the decumulation fund.
Kocken’s idea is essentially a new iteration of the old cash-balance concept. But the idea has great merit. It retains an element of solidarity through the collective nature of the investment pools and the certainty of the annuity payout. It formalises a conditional element that is now already present in the Dutch system but anchors this in the contribution phase when younger members have time to regain investment losses.
Its simplicity means it is much easier to explain and it obviates the need to marry old entitlements in a new FTK framework, since the two elements exist side by side, with the growth fund increasing in size year by year. It also means younger members know what their exact share of the assets is. Given that the Dutch insurance industry is too small to underwrite anything like the entirety of the country’s DB risk, funds would essentially act much more like mutual insurers.
Whether Dutch stakeholders are willing to accept such a radical change is open to question. But such bold ideas are needed and a break from the traditional concept of pension solidarity is probably necessary if the system is to retain any element of solidarity.