The added value of risk-sharing among generations in pension funds has been systematically overestimated, according to researchers at Netspar, the Dutch expertise platform for retirement, pensions and ageing.
In a report, Jan Bonenkamp, Peter Broer and Ed Westerhout argue that the benefits of sharing investment risk in collective schemes, relative to individual pension plans, is only a fraction of what has been claimed in previous research.
Their findings up the ante in the debate between supporters and opponents of intergenerational solidarity.
The unions, for example, are keen supporters of collective schemes.
Netspar’s researchers, however, argue that previous studies painted a rosy picture of risk-sharing, as they were based on optimal collective schemes that deviated from the “real situation”.
Earlier surveys estimated the added value of a collective scheme at 5% on average during a lifetime compared with individual defined contribution plans, with one study even claiming a benefit of 20%.
Netspar estimated the added value at no more than 0.2%.
It attributed the lower benefit in part to its calculation method, which took all generations into account rather than a limited number.
The conclusion tallies with the findings of a report by Netspar and the Dutch Bureau for Economic Policy Analysis (CPB) last year, which concluded that the benefits of risk-sharing had decreased as a result of population ageing.
According to this report, the prosperity benefits of a collective scheme stands at 1%.
Earlier this week, the large civil service pension fund ABP and the healthcare scheme PFZW threw their weight behind a future pensions system with individual pensions accrual, but only as long as collective risk-sharing remains.
Peter Borgdorff, director at PFZW, warned that, without the solidarity element of collective buffers, participants would be unable to carry all risks while accruing a pension individually.