The Dutch government should introduce retirement bonds with a return linked to GDP growth in lieu of a shift to pay-as-you-go (PAYG) pensions, according to two Dutch economists and the former CIO of the country’s civil service pension fund ABP.

Arguing the European economy is facing stagnation as the number of retirees increased, Jean Frijns, Anton van Nunen and Theo van de Klundert say the resulting low interest rate environment made funded pensions difficult to sustain.

Writing for IPE, Frijns, van Nunen and van de Klundert say the solution for the funding problems facing the current pension system is to transform it into one partially based around a PAYG model, although they accept that such a proposal does not “sit well” with many in power.

“We therefore propose an alternative, which has some of the characteristics of an unfunded system as it offers a stable albeit low return but is also directed towards increasing government investment,” the authors say of their notion of retirement bonds (RBs) issued by governments.

“The issuing governments would guarantee coupon payments and redemption and the yield would equal nominal GNP growth.

“Revenues would be allocated to government investments to realise the targeted macroeconomic capital ratio as an answer to ageing.”

The authors argue that any debt associated with retirement bonds should not see governments fall foul of European Union rules on debt, arguing the bonds can act as an alternative to European Commission president’s €315bn Investment Plan for Europe.

The notion of retirement bonds is not the first radical shake-up of the Dutch pensions syetem backed by Frijns.

He has previously proposed a shift from capital-funded pensions to a PAYG model and suggested ABP become a defined contribution fund.

Read Jean Frijns, Anton van Nunen and Theo van der Klundert’s full piece on