The long-running debate in the Netherlands over how to build a sustainable and acceptable pension system has taken another step towards its final destination. 

The Dutch Pensions Federation, with industry support, has approved the two “most promising” alternatives presented by the Social and Economic Council (SER). In May, the SER – the representative body for employers and workers – produced a “target” contract for a pension in real terms, and a set-up including individual accrual, both with collective risk-sharing.

Over the last six months, four working groups have been assessing the SER’s options on pension returns, viability, communication and legal and fiscal aspects, assuming the current average accrual is replaced with fixed contributions and age-dependent pension rights.

The experts, however, failed to agree on the perfect option. They concluded that the target variant scored better on participant protection and “prosperity benefit”, but they warned it might be susceptible to legal challenges following the introduction of age-dependent accrual.

The working groups said the alternative of individual accrual would be much easier to explain to participants than the concept of pension rights. This variant, however, would offer less protection or collective risk-sharing. 

The Federation has now sent the screened options back to the SER, which is to combine the best parts of both into a final proposal. The Federation said it expected to be able to produce something in early 2017.

Several obstacles remain. The issue of pensions accrual, for example, is still a hot potato. Although the government has decided that the current average build-up is to be replaced with ‘degressive’ accrual – where younger workers accrue a proportionately larger pension than their older peers – as of 2020, the transition will be complicated and expensive. Older workers will need to be compensated in a deal that could cost up to €40bn in tax revenues and take up to 10 years. 

And the already fragmented political landscape in the Netherlands is likely to be divided further, with at least 18 political parties taking part in the parliamentary elections next March. A government coalition will probably need the support of 4-5 parties. As the pensions contract is, in principle, a matter between employers and workers, Jetta Klijnsma, state secretary for social affairs, has repeatedly urged the sector to cut the crucial knots before overambitious political leaders do it for them during coalition discussions.

Another big question is whether asset managers and pension providers will be able to implement the proposed changes in time. If the sector adopts a contract of individual accrual with collective risk-sharing, asset managers have to switch from a uniform investment policy to a lifecycle-based approach. 

In addition, pension administrators will need to adjust their IT systems, and new asset-liability management studies will need to be carried out, the €433bn asset manager and pensions provider APG has warned. Last but not least, all of these changes will need to be explained to pension fund participants.

All of these changes will take time to be implemented. The government’s goal is to have the new system up and running by 2020. Gerard Riemen, director of the Pensions Federation, said the transition to degressive accrual could make that deadline in the quickest possible scenario, where the formation of a new government takes no more than a couple of months.