Collectivity, risk-sharing and solidarity in the Future of Pensions Act

“How design choices shape outcomes for participants”

What is the focus of the paper?

The paper explains how the Future of Pensions Act incorporates collectivity, risk-sharing and solidarity in the Flexible Premium Scheme (FPR) and the Solidary Premium Scheme (SPR). These arrangements are compared with defined benefit schemes under the former Financial Assessment Framework and with individual defined contribution schemes. The paper also discusses economic and social implications, such as the welfare losses caused by insufficient tailoring, implicit redistribution between participant groups (e.g., due to differences in life expectancy or disability risk), and the influence of behavioral factors on pension decisions.

What are the key findings?

The paper explores four main themes: risk-sharing, subsidizing solidarity, collective design, and choice architecture. The paper considers mechanisms such as the sharing of longevity and inflation risk, forms of implicit redistribution arising from uniform contribution structures or premium surcharges, redistribution through collective reserves, and the extent of collective implementation, governance and decision-making.

Both the FPR and SPR offer ways to structure solidarity in a transparent and explainable manner. In both, collective implementation remains a cornerstone. The FPR gives social partners and participants slightly more room to differentiate risk profiles, whereas the SPR organizes intergenerational risk-sharing more explicitly, e.g. through the solidarity reserve. This reserve can buffer shocks and allocate wealth across cohorts, but a degree of subsidizing solidarity persists in both schemes (for example, through uniform contributions or shared reserves), though the desirability of such transfers depends on one’s perspective.

The additional design choices introduced by the new framework lie primarily with social partners and pension providers, who must decide on aspects such as distribution rules, lifecycle design and the degree of collective risk-sharing. These choices create opportunities to better reflect differences between participants, but also add complexity. Individual choice itself increases only marginally and remains difficult for many participants to navigate, due to well-documented behavioral effects and the inherent complexity of pension decisions.

What are the implications?

• The law provides room to better structure collectivity, solidarity and risk-sharing, provided that policymakers, social partners, administrators, and regulators properly shape and embed these principles in the contracts.
• The increased number of design choices for social partners and pension providers requires clear and consistent default options, enabling participants (whose individual choice options remain limited) to be effectively supported when making complex pension decisions.