Giving birth to hybrids
As the Netherlands has one of Europe’s most established pensions market it is often perceived as having a highly-developed defined contribution (DC) market. In reality it is adapting slowly and the transition towards DC is at a relatively modest rate. Talk of the shift to DC has exceeded action. Says Gerard Bergsma of ING investment management, “We’ve been hearing this for five or six years about a shift to DC but there is little evidence of this at the moment. So far we have seen many supplementary schemes but the amounts are still small.”
Others are more optimistic. According to Maarten Zant, principal at Palladyne Asset Management, there is evidence of a move towards DC provision, largely due to the evolution of the job market and the ease with which employees can and do change jobs. Employees are becoming what Zant describes as more Anglo Saxon in their approach to work. In other words, the average job is now held for less time and employees, for whatever reason, now feel freer to change jobs as and when they see fit.
Such attitudes are no better illustrated that in the IT sector, a booming industry where those with the correct skills are headhunted ferociously. Says Ronald Nagel, head of institutional services at ABN Amro asset management: “Coming from an extremely well-funded system, the need to have DC on top of defined benefits is not that big. The only reason you need to consider it is because you want to offer more flexibility to your participants.”
Interestingly, ABN Amro offers the choice of either a DB or DC scheme to its employees but Nagel admits that few scheme members show much interest in taking their own pensions decisions. “There is more interest in DC than a few years ago but it is not as hot as we thought it could be,” he says.
Resistance is also in part due to familiarity. Says Zant: “the Dutch system is never going to be a completely DC market like you have in the US. It’s so ingrained in the culture of our country that I don’t see a complete change to DC happening too fast.”
New companies are launching their own DC systems and there has been a shift from final pay to average pay. Larger companies are heading towards a hybrid approach where members receive a DB pension up to average salary and are able to top it up with DC contribution as they see fit. Jandaan Felderhoff, director of client relations at Lombard Odier asset management is convinced pensions will become more and more personalised in the long run.
DB diehards may also have their hands forced by the markets if they continue to perform so poorly. “Suppose we have another couple of years with low or zero returns, it’s very difficult to maintain these expensive final pay systems,” says Felderhoff.
Ready and waiting to serve these new schemes are DC products and ABN Amro, ING and Robeco are leading the way. Robeco, for example, launched its DC product Flexioen in the early 1990s. Scheme members contribute a certain amount every month which is then invested in any of the Robeco funds. The scheme is open to Robeco employees who then receive monthly updates and are able to monitor progress and make changes over the internet. According to Bas Vliegenthart, head of investment at Robeco asset management, 11 pension funds have subscribed in the first quarter this year taking the total number of members to 15,000. Next month ABP is introducing a DC type, top up arrangement for employees following changes to Dutch tax laws at the beginning of the year.
So what will the Dutch market look like in 2010? The US is the natural comparison for DC markets but in the case of the Netherlands, such comparison is spurious as fundamental differences between the two markets exist. “The system in the Netherlands is particularly good. For the average person there is little need to build an additional pension. You cannot compare it to the States where you really have to build your own pension,” says Bergsma.
Instead the market in the Netherlands is likely to come to a rest at a hybrid of the two- DB up until a certain salary, supplemented thereon by a top up DC scheme. “This is the most logical development with the exception of fast growing IT companies where the labour conditions are totally different. For the majority of pension funds in the Netherlands it is logical to expect hybrid forms in the near future instead of complete DC,” says Jan Lodewijk Roebroek, executive director of institutional buisness at Fortis investment management.