A mandatory basic pension on top of the state pension is a good way to protect the growing group of gig economy workers against a sharp drop in income post-retirement, according to a study by pension think thank Netspar.
Most self-employed and other flexible workers currently save too little in order to maintain their living standards after retirement. The authors of the study, which include retired professor Casper van Ewijk (University of Amsterdam) and professor Ton Wilthagen of Tilburg University, noted that most workers that fall outside the scope of mandatory pension arrangements tend not to save sufficiently for their pension.
This is due to their often limited income not allowing for pension savings, as well as to psychological reasons including “postponement behaviour” and an underestimation of financial needs post-retirement.
Measures to improve the level of pension savings for flexible workers have not led to an increase in pension savings so far. Recently, an effort by trade unions to improve pension arrangements for workers in the temporary employment sector failed.
“The problems of the self-employed and others not saving enough for their pension is persistent,” said Van Ewijk. He does not expect employers in new sectors such as media and IT will be willing to introduce mandatory pension agreements in the second pillar.
He added: “Therefore we need to find other ways to make sure all workers save enough for their pension.”
The researchers therefore requested the introduction of a so-called “minimum acceptable pension” (MAP) that will be related to people’s wages. As an example, they suggested a minimum replacement ratio of 55-60%.
This minimum can then be supplemented in the second pillar, where a replacement ratio of 80% after 40 years of work is the standard.
The MAP would be a supplement to the state pension. “Its purpose is to avoid a sharp drop in income post retirement,” said Van Ewijk. Because the MAP depends on previous income from labour, it is possible there will be no add-on for some low-income groups.
Responding to the study, Willem Noordman of trade union FNV, said he would rather see an increase in the state pension than a separate basic pension for workers alone.
British or Swedish model
The researchers sketched two different versions of the MAP. “The most far-going option is to make it mandatory.” This could be done either within existing pension arrangements or by introducing a separate ‘non-financial defined contribution pension’ (NDC), modelled on the Swedish example which is based on pay-as-you go financing, Van Ewijk said.
According to the researchers, an important advantage of the NDC is that the payments are index-linked and independent of developments on financial markets. “Internationally, pensions in the Netherlands are quite sensitive to financial market risks,” he added.
The professors did not voice a preference for who would be put in charge of the new arrangement. It could be done by the state or by industry-wide pension funds.
A second, more individual variant is auto-enrolment based on the NEST model in the UK – a defined contribution workplace pension scheme set up to facilitate automatic enrolment as part of the government’s workplace pension reforms under the Pensions Act 2008.
Due to its public service obligation, any UK employer can use NEST to meet its new workplace duties as set out in the Pensions Act 2008.
The researchers also suggested additional reforms to the pension system by making pensions more flexible, along the lines of an earlier proposal by government think tank CPB.
The duo suggested workers should be allowed to divert pension contributions to paying off their mortgages or student loans. This would make sense because a quarter of workers save more for their pension than they need to maintain their living standard, they added.