The Netherlands should increase pay-as-you-go (PAYG) arrangements in its predominantly capital-funded pensions system to better address the impact of low interest rates, according to Jean Frijns, former CIO at the €355bn Dutch civil service pension fund ABP.
In an interview with Dutch financial news daily Het Financieele Dagblad (FD), Frijns said capital-funding was “no longer fit for purpose”.
“The pensions sector failed to foresee how much participants would be exposed to market shocks, and the pensions system no longer provides the certainty we expected,” said.
Given the level of interest rates, he said PAYG arrangements, such as the state pension AOW, would now be more attractive than pensions saving – ageing population notwithstanding.
Frijns’s proposal is likely to raise eyebrows in the industry, as the Netherlands has always dismissed pensions systems in neighbouring countries that rely heavily on PAYG.
“We always thought capital would offer greater security, as well as pension value, than PAYG, which depends on political promises,” he said.
“Because this is no longer true, we shouldn’t be afraid to adjust the ratio slightly between capital-funding and PAYG.”
He said he was surprised by the lack of debate on this issue in the Netherlands.
According to the FD, Frijns took pains to emphasise that he did not advocate raising the AOW, as non-workers would “unjustly benefit”.
Instead, he called for a new national scheme with income-based contributions and benefits, which could also accommodate self-employed workers.
The industry veteran conceded that introducing an additional PAYG system would not be easy.
“But, from an economic point of view, it would be fantastic, as it would mean less saving, and it has the potential for increased spending,” he said.
The Social and Economic Council (SER) is preparing a recommendation for the Dutch government on how best to design a sustainable pensions system.
The SER is expected to call for a switch to defined contribution arrangements, with individual pensions accrual combined with various forms of risk-sharing.
It marks the second time in five years that a reform of the Dutch pensions system has been the subject of debate.
The first effort stalled after transition arrangements were deemed as overly complicated.
“If new reform plans also turn out to be infeasible, pension funds should close and start new pensions accrual under individual arrangements,” Frijns told the FD.
“That would be a simple and quick solution.”