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Freedom of choice is ‘no guarantee of a better pension’

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Allowing workers to pick their own pensions provider does not automatically lead to a better pension, according to research by Dutch pensions think-tank Netspar.

Increasing the options available to individuals has formed part of the debate about a new pensions system in the Netherlands. Currently, Dutch employees must participate in a pension fund, while companies without their own scheme or insured arrangements must take part in an industry-wide pension fund.

Netspar’s researchers concluded that allowing ‘freedom of choice’ was complicated, and it would prove difficult to ensure a pension from a new provider was equal to the investor’s current one.

The five authors – who wrote the report in personal capacity – said they had taken into account the mistakes that have been made in countries with freedom of choice, including Australia, Sweden, the US and Chile. 


Supporters of freedom of choice emphasised that it enabled participants to fulfil their personal wishes and needs, the researchers found, while opponents argued that it was complicated and expensive and came at the expense of the best outcome.

The researchers concluded that expectations related to freedom of choice should not be too high, as the large majority of participants didn’t choose, but used the default option instead. This meant that the default option should be a proper solution for most participants, they said.

They also discovered that freedom of choice didn’t automatically lead to a reduction of costs at providers.

As costs in the Netherlands are already relative low, the introduction of a choice option was likely to increase costs as a result of additional marketing, they argued.

The five authors – Heleen van Boven, Allard Bruinshoofd, Jesse Martens, Arjen Monster and Manon ten Voorde – also found that freedom of choice could lead to lower pensions.

They also noted that the choice of provider could complicate investment policy, pointing out that illiquid holdings such as infrastructure and private equity could become a problem if participants chose leave a pension fund.

Therefore, switching schemes should be limited in order to avoid remaining participants losing out.

The researchers suggested that this would require conditions, such as a minimum number of years for participants to stay a scheme, and a cap on the percentage that could leave in a single year, to prevent participants leaving wholesale.

The UK introduced its own ‘pension freedoms’ in 2015, removing the requirement for pension savers to buy an annuity. This has led to an increase in the number of people cashing in their pensions in full at retirement, and led to more interest in drawdown products. It has also led to a larger number of people seeking to transfer out of defined benefit schemes in order to have more flexibility with their pension.

However, it has also led to a significant increase in scams affecting older people as fraudsters attempt to entice investors into niche investments. UK regulators have stepped up their anti-scam activity this year, while a committee of MPs from parliament’s lower house has launched an inquiry to assess the impact the pension freedoms policy has had.

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Readers' comments (1)

  • What is surprising is the implicit assumption that this is news. In fact, we have known at least since Sweden went this route that "freedom of investment choice" diminishes pensions because a large majority of people is not equipped or willing to make such choices. However, there are enough people around who are willing to deny the facts for the sake of maintaining their political dogma.

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