The Netherlands, with its predominantly capital-funded pensions system, should reconsider the current balance between capital funding and pay-as-you-go (PAYG), as the latter is currently more attractive, according to Jean Frijns, former CIO at the large civil service scheme ABP.
Speaking at a book launch, Frijns argued that, in light of low interest rates, it made sense to place more emphasis on PAYG for the AOW state pension.
He said a gradual transition to higher AOW benefits would also partly resolve some current problems in the Dutch pensions system, such as pro-cyclical effects as well as the fact that many self-employed workers (zzp’ers) only accrue AOW rights.
Frijns said there had been no debate on capital funding versus PAYG since the 1950s and that the “glorification” of the capital-funded system had “continued for too long”.
He said a gradually increased AOW could ease transitional problems caused by the planned abolition of the average pensions contribution.
The former CIO, who chaired a government-appointed committee looking into investment policy and risk management at pension funds in 2008 and 2009, also claimed the Dutch system still faced “structural weaknesses”.
He said these vulnerabilities had increased despite improvements in pensions provision and governance, arguing that the system had become a “plaything” of the markets because of its capital funding.
“The low interest rates combined with the effect of the new financial assessment framework (nFTK) has doubled the scale of pension funds and made them too big relative to average earning and GDP,” he said.
Frijns further argued that premiums were pro-cyclical, that pension funds contributed to the national savings surplus and that the system hindered labour mobility.
The industry veteran predicted the new pensions system would provide for individual accrual and annuity-based benefits, carried out for ring-fenced categories of participants within pension funds.
This, he said, will tackle the structural conflict between the generations in the current collective system.
However, Frijns was sceptical that the government would tackle problems arising from the dividing up of pension funds’ assets or the cost of abolishing the average contribution.
He said the government was likely to leave these for pension funds to solve.
He also argued that regulators DNB and AFM were “co-governing” too much.
“Focusing too much on costs and outsourcing details comes at the expense of participants’ interests, as well as the risk/return ratio,” he said.
Frijns recently stepped down as supervisory chairman at Delta Lloyd following a dispute between DNB and the insurer’s executive board about a derivatives transaction.