Product choice over 'hard floor' would improve pensions, academics say
NETHERLANDS - Increased pension product flexibility over an "income floor" of annuities would improve the effectiveness of Dutch workers' pensions, academics have claimed.
The flexible part of their benefits should allow for choice of products, such as variable or delayed payout annuities, mutual funds or bonds, according to Jeffrey Brown, professor of finance at the University of Illinois.
However, according to Theo Nijman, professor of investment theory at Tilburg University, bank saving products are ineffective in this context because the resulting annuities are paid during a set period, which is unlikely to cover the last phase of a pensioner's life, when funds for care are probably needed the most.
Both professors spoke at a conference about pension reform organised by the Dutch Bureau for Economic Policy Analysis and Netspar, the platform for pensions, retirement and ageing.
The "pension floor" is meant to support pensioners' basic needs and should equate to at least 50% of the real pre-retirement income, Brown argued, adding that it should also be well-protected against inflation,
He recommended a voluntary but automatic annuitisation by default for the available funds above the basic pension.
Brown argued that conditional indexation of pensions was not the optimal way to handle financial problems at pension funds, as this created "uncertainty in the income stream of pensioners and workers who are approaching retirement".
Responding to Brown's suggestions, Monika Bütler of the University of St Gallen noted that experience in Switzerland had shown inflation protection was a "hard sell", as it came at the expense of the benefits.
Henriëtte Prast, professor of personal financial planning at Tilburg University, and Zwi Bodie, professor of finance and economics at Boston University, made the case for auto-enrolment and automatic rebalancing of investments as the default option for workers' pension decisions.
They argued that people "can and often do make damaging mistakes" in saving and investing for retirement, as well as tend to delay difficult decisions.