Smart solutions for the self-employed
The theme of the sixth annual PensionSummit in Noordwijk was dedicated to managing individual pension risk, with special attention given to the increasing number of self-employed in the Netherlands. Action is needed to provide for better pensions for this group which amounts already to 12% of the working population. The self-employed cannot take part easily in company or industry-wide pension schemes, because of their self-employed status.
Since 1 April Cordares has offered what it calls an ‘OPen Pensioen' solution for the self-employed. This solution is based on ‘defined risk', tailored to a participant's ability and willingness to bear pension risks. A participant can set a target capital and decide whether to invest in guaranteed products and/or a diversified investment portfolio, which automatically reduces risk when approaching the retirement date. Furthermore, the participant can add insurance elements to hedge specific risks, for example, mortality.
In this way, a ‘defined risk' approach combines the advantages of defined benefit with an individual (defined contribution) approach. The OPen Pensioen solution (see www.openpensioen.nl) has been developed for AVV, a new union for the self-employed in the Netherlands. In a workshop at the PensionSummit, Martin Pikaart, the chairman of AVV, explained why innovative pension solutions are needed for the self-employed.
A large majority of the PensionSummit participants was in favour of improved tax treatment for individual pensions. In an internet survey before the PensionSummit (with a response rate of 61% from a group of pension fund directors, board members and advisers) and a vote at the PensionSummit itself, two-thirds supported this view. The audience was split on where to invest individual pension savings (see figure 1)
A minority, 40%, was in favour of investing in a diversified portfolio which automatically reduces risk towards retirement (following a life-cycle principle), but 43% wanted to combine this portfolio with guaranteed products. A meagre 11% of the audience supported the traditional approach of leaving the issue of selection of mutual funds to participants.
Interestingly, in case of the self-employed, rather than individuals in general, the audience favoured the combined approach of guaranteed products and a life-cycle investment mix (48%).
Two-thirds of the participants supported the view that self-employed should have access to a pension solution at a similar cost as employees in collective schemes, and 60% thought that the cost of collective pension schemes was lower than individual solutions.
Voluntary participation in a new collective pension scheme in which the self-employed from different sectors can take part was seen as the best solution (see figure 2).
Around half of the participants shared this view - respectively 55% and 46% of pre-conference survey and PensionSummit participants. Another 10% (respectively 22%) was in favour of continued (voluntary) participation in an existing sector pension fund. This latter option might apply, for example, to a construction worker starting his own firm, and continuing to pay his pension contributions to the construction sector pension fund.
PensionSummit participants were undecided with regard to the question whether collective DC - which has been much discussed in the Netherlands - could offer a solution for a voluntary pension scheme for self-employed.
The introduction of a special pension account which will be tax-exempt (not taxed in income tax Box 3 for savings and pensions) was supported by 49% of the audience and 68% of those who took part in the pre-conference survey.
A large majority of the audience (86%) expected that the introduction of special bank accounts which will allow the accumulation of blocked pension savings (following a proposal in parliament by two MPs, Staf Depla and Stef Blok) will lead to an increase in pension savings.
nother interesting outcome concerned the impact of improved communication to participants with regard to the quality of expected indexation and coverage ratios of pension funds. Over 90% of participants expect that this will lead to a selection bias: participants will transfer pension money (in case of job transfer to other sector of company) to funds which provide better chances of indexation and better coverage ratios.
One panellist at the PensionSummit suggested using market valuation for these transfers of pension accounts from one fund to another to avoid this selection. A small majority (55%) support a more active government role with regard to the issuance of inflation-index bonds and also in providing hedging opportunities for longevity risk.
The PensionSummit showed that easy access to cost efficient pension saving instruments as well as easy to understand pension products, are as important for the self-employed as for other employees. Pension solutions for this purpose should contain well-designed defaults to offer security and transparency to its users. Expert knowledge in collective pensions offers a good starting point for these innovations.
Alwin Oerlemans and Jeroen Tielman are respectively senior business developer and managing director at Cordares in Amsterdam