NETHERLANDS - Collective defined contribution (CDC), in a climate of limited interest in pensions and irrational decision-making, is not the cheapest option, argues an official at Dutch pension regulator De Nederlandsche Bank (DNB).

In the switch to CDC schemes the risks for the employer are decreased, but this comes at a price - according to Margreet Schuit, a member of the DNB's policy supervision department.

"For the employer, the switch to collective DC does not offer a decrease in pension costs if the pension promise stays the same," she said in an interview with Dutch Association of Industry-wide Pension Funds, the Vereniging van Bedrijfstakpensioenfondsen (VB).

She said: "In practice you see that the unions demand a healthy starting situation of the pension fund at the switch to collective DC," and one of the requirements could be that employers are forced to make an extra payment to improve this starting situation of the fund.

In another interview with VB, DNB researcher Henriëtte Prast was reluctant about the switch as "employees run more risk than they did before".
Hence, in a climate marked by irrational financial decision-making, where people show little interest in their pension, funds need to consider carefully how to present information to their members. She said: "There is a lot of information, but people do not read it. And when they have to make a choice, they don't make a rational one."

Furthermore, employees are under the impression that their pension has been automatically arranged for them properly. Prast predicts that this will cause people to spend even less time on their pension.

She calls for a construction that, despite demographic ageing, offers enough buffers to hold on to the defined benefit system, or a DC system "that ensures that people do not get into problems".

Pensions professor Guus Boender, also a director at consultancy firm Ortec, shares DNB's lack of enthusiasm and argues that DC is being used as some sort of panacea.

Instead, Boender would prefer a hybrid DB-CDC scheme complemented with buffers and complete transparency.