In search of a square circle
The Dutch are undertaking a major overhaul of their pensions system. ‘Again?’ you might ask. After all, the Dutch have been tinkering with their system for years, drafting and rejecting one daring redesign after another, while engaging in bickering over the best way to modernise and ‘future-proof’ their slightly outdated, second pillar.
This round of reforms is the most ambitious. Much of the previous discussion focused on technical matters such as the proper discount rate, longevity issues, tax regulations, indexation provisions and funding requirements. With the approval of a new fiscal and financial framework last year, those issues have been settled, clearing the deck for a fundamental review of the system.
As pensions concern every Dutch citizen, state secretary for pensions Jetta Klijnsma has decided that such a review must include a national discussion. Starting last summer, the Department of Social Affairs and Labour organised a string of ‘town hall meetings’ in addition to inviting a wide range of experts and interested parties to share their views. Input from these will be incorporated in a pensions reform outline that Klijnsma is expected to send to Parliament in May, and which is to present “building blocks and policy options” for a pensions system fit for the twenty-first century.
Already a trend is emerging. Academics and pension experts seem to be converging on a new, as yet to be developed type of individual DC-cum-collective risk sharing that seeks to combine the best of DB and DC: clear individual ownership rights, but with the benefits of collective risk sharing; lifecycle investing, yet allowing for continued investing in risk-bearing assets after retirement; room for individual tailoring and some freedom of choice, but with mandatory participation and solid, well-developed defaults.
The think tank Netspar first proposed this hybrid approach last year. In January the influential Social Economic Council – an advisory body to the government – highlighted this as a promising route to explore, a suggestion since endorsed by various other players including the Dutch Pension Federation and the umbrella organisation of insurance companies. The €162bn Dutch healthcare scheme PFZW does not exclude other options but called individual DC with collective risk sharing ‘possibly the best of both worlds’.
But whether such a hybrid solution can be realised, remains to be seen. Collective risk sharing has a nice ring to it, but which risks should be shared with whom? The big challenge is to strike a fair and workable balance between the individual and the collective. “It’s a little bit like trying to find a square circle,” as crown-appointed SER-member Fieke van der Lecq put it.