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Aon Hewitt offers blueprint for new Dutch pension system

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Aon Hewitt has presented its blueprint for a new, alternative pensions system in the Netherlands, focusing on fine-tuning the current one rather than radical change.

The consultancy recommended splitting pensions into compartments for workers and pensioners within an individual pension fund, and introducing age-dependent indexation.

Aon said its plan, unlike others under discussion, would avoid a complex transition and deliver better results than those produced by the current system.

At the moment, the Dutch Social and Economic Council (SER) is considering two alternatives for a new, sustainable pensions system.

In addition to a variant of individual pensions accrual combined with collective risk-sharing, the SER is also assessing a pensions contract based on real pensions, rather than nominal pensions.

The latter option is to be combined with degressive accrual, rather than the current average accrual, which would be more equitable for younger participants.

However, according to Mike Pernot, an actuary at Aon, the SER’s first alternative would be complicated “because of the required financial buffers, while it would not provide certainty, as it is basically a defined contribution system”.

He added: “Besides the degressive accrual, the latter variant would not differ much from the current system, and it would also have its drawbacks.

“Our blueprint would provide more stable pension rights for pensioners, as well as advantages for younger participants, because the solidarity between the generations would, in part, disappear from the system.”

Aon cited age-dependent indexation as an alternative for the introduction of degressive accrual, as pension rights accrued as a 25 year old would entitle workers to full inflation compensation sooner than rights accrued close to retirement age.

Indexation for all age groups, however, would start at a scheme’s funding of 105%, according to the consultancy, which noted that pension funds would face increasingly complex administration.

By separating pensions rights into compartments for active participants and deferred members and another one for pensioners, the latter group could be offered a defensive investment mix.

If funding for pensioners falls short of 100%, any necessary rights discount could be limited in scale through a contribution from the workers’ compartment.

On the other hand, any surpluses relative to a coverage of 130% would flow back to the workers’ compartment, Aon said.

Pernot pointed out that indexation for pensioners would already be possible at 100% funding but would be less following the defensive investment policy.

In Aon’s plan, younger workers would be entitled to inflation compensation as soon as their funding exceeded 105%, as financial buffers to protect pensioners against cuts would no longer be needed.

Under the rules of the current financial assessment framework, pension funds can start indexing in part with funding of 110%, while full indexation is only possible with a coverage of 125%.

In Aon’s plan, retiring workers would migrate to the pensioners’ compartment at ‘neutral funding’ – i.e. their rights would be discounted in the event of a shortfall and they would be granted additional rights if there were a surplus.

Measuring its plan against 2,000 economic scenarios used by the Dutch regulator, Aon concluded that the current pensions system only performed better in the worst scenarios.

Pernot said Aon’s system could be introduced relatively easily, and before 2020, by adjusting the nFTK.

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  • QN-2546

    Asset class: Real Estate Equity Fund (non listed).
    Asset region: Europe.
    Size: Total CHF 600m, approx. CHF 100-300m per fund investment.
    Closing date: 2019-06-28.

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