The Dutch pensions industry should slow the pace of consolidation and start examining defined contribution (DC) solutions with individual contribution rates seriously if it wishes to prosper in future, according to a group of academics and industry professionals.
Speaking in the September issue of IPE magazine as the government begins a wide-ranging, three-month dialogue with the public on the future of the pension system, the panel questioned whether the Dutch approach to solidarity could endure and warned that beneficiaries faced a decade without indexation due to proposals contained within the new financial assessment framework (FTK).
Alfred Slager warned that the current emphasis on consolidation, triggered by regulator De Nederlandsche Bank’s insistence on minimum standards for board members and solvency requirements, could cause problems.
The professor of pension fund management at Tilburg University accepted that a minimum pension fund size was “a good, efficient thing to have”.
“However,” he said, “without a clear vision on consolidation, the sector might drift towards an outcome with unintended consequences: a small number of pension funds managed like large financial institutions, potentially stifling much needed innovation.”
The academic also warned that consolidation could introduce macro-economic risk into the pension system, akin to the risks seen in the insurance and banking sectors.
Hans Rademaker, member of the management board at asset manager Robeco, identified other problems stemming from the new FTK.
According to him, the proposals are “more of an evolution, rather than the necessary revolution”.
He said there was a need for more clearly defined ownership rights for members, and that the way forward should be “a blend of the best” of DC and defined benefit (DB) systems, allowing individual accrual but also risk-pooling when the beneficiary begins drawing down entitlements.
Meanwhile, Keith Ambachtsheer, director emeritus at the Rotman International Centre for Pension Management, argued that the problems were the result of “the Dutch tendency to love ‘solidarity’ too much”.
He said younger generations would reject the current system and oppose the “faux solidarity” resulting from the need to underwrite the risks of older generations.
However, he said he was hopeful change was possible.
“Managing [a] transformation will require strong leadership,” he said. “I am betting it will emerge soon.”
PGGM’s head of strategic consulting, Erik Goris, said he viewed the system’s biggest problem as its social sustainability, as job mobility and a greater desire for freedom of choice grow in importance.
“A culture change is needed, and we will help ourselves greatly if we dare to think in terms of a DC-type of solution,” he said.
“Indeed, such a system answers better to today’s social questions.
“Preserving the current system’s benefits of collectivity and risk sharing will be the challenge.”
Goris also warned that the revised FTK brings with it increasingly complex rules to ensure pension promises are sustainable, and said that, as a result, pensions will become more complicated to explain.
Additionally, the increased security of the FTK will lead to prolonged periods without indexation, as the security to preserve purchasing power will “prove unaffordable”, according to Peter Borgdorff of healthcare scheme PFZW.
“As a result, the participant will end up paying for the government’s plans by means of a structurally lower pension,” he said.
For further expert opinions on the Dutch pension system, see the current issue of IPE magazine