Review of the Thematic Conference on the Changing World of Pensions, Financial Planning, and Choice Architecture

To what extent does the existing pension system still fit organically into our changing society? As individual responsibility and risk assumption grow, it is almost impossible to avoid having to offer more options. Yet this raises the question of what role customization and freedom of choice might play in providing people optimized financial planning for their entire life course. What is the potential impact on prosperity? These are the central questions of the theme project called “Choice Architecture in Pensions and Retirement.”

On October 3, Netspar, the Netherlands Bureau for Economic Policy Analysis (CPB), and Dutch pension fund APG co-hosted a thematic conference on the developments in this area in the Netherlands and elsewhere at which some initial research findings were presented. The conference focused on the Netspar theme project Choice Architecture in Pensions, which for the next few years will be investigating the impact of greater freedom of choice and customization in pensions.

Changing World of Pensions
Laura van Geest (CPB) sketched a picture of a future in which we all live longer and, for many of us, each additional year of life is also one lived in good health. Although the percentage of people with chronic illness is growing, this is not having a large or direct impact on the percentage of disability cases – even with increases in the social security entitlement age. There are, however, vast disparities among groups of the population. Moreover, healthy does not necessarily mean productive. To what extent are people able to keep up with technological advancements, for example? In many cases, they have to be retrained in order to remain broadly employable, something less frequently available to the poorly educated. Income distribution across the life cycle could also improve. The question is to what extent can people work toward optimized financial planning with only limited know-how and engagement?

Freedom of Choice: Economic Gains?
Would a system that offers complete or partial freedom of choice create greater engagement and boost pension literacy? Isn’t it possible that the risk of bad decisions would become too great? The economic losses associated with insufficient contributions can be significant, coupled with the fact that pension participation is already under pressure in the Netherlands, due in part to the growing number of independent contractors. At the same time, over-saving is a risk, as well. While having a good basic standard is important, introducing a limited degree of freedom can definitely yield economic gains, as Marcel Lever (CPB) explained in his presentation.

International Experience
In both England (presentation) and Australia (presentation), where people have more choices than in the Netherlands, far and away the greatest number of people choose the default option. Moreover, other freedoms in terms of options, such as the ability to withdraw a lump sum, do not necessarily lead to problems or irresponsible behavior. Education and advice about financial issues, including retirement, play an important role in helping people make the best possible decisions. Employers and the government can take the lead in this. Denmark (presentation) is much like the Netherlands in that it has a paternalistic pension system with very few options to choose from. When it comes to pensions, people there, same as the Dutch, are like fish: they do not appreciate the water they swim in. The Dutch pension system offers a relatively great deal of certainty, but it is also worth considering offering a limited degree of freedom to better accommodate people’s individual needs.

Conditional Freedom of Choice and Home Ownership
Eduard Ponds (TiU) describes what form this might take in his exploratory study of the options for “conditional freedom of choice.” The older generation in the Netherlands has a good amount of wealth on average. There is also a great deal of heterogeneity, however, with as many undersavers as oversavers. A more critical look into these different personal situations will need to be taken in the future. At the same time, much of people’s personal assets is tied up in their homes, and there is no market for cashing in on that home equity. Dirk Brounen surveyed the options that currently exist, along with the associated costs. This study of home equity as a supplement to retirement income will be further developed in the months ahead. Conditional freedom of choice, whereby a subject is offered one or two concrete options, such as a lump sum payout or cashing in on surplus value, would appear – in light of the international experience – to be a good option for a better distribution of wealth over the entire life course. This will be more deeply explored in the thematic project.

Execution
The closing presentation was by Gerard van Olphen (APG). He stressed the fact that the success of any pension system lies in its execution. This will require a critical reexamination on the part of providers, whereby they reorient themselves from prioritizing the product to prioritizing the participant: more options that accommodate individual circumstances, greater transparency, with simplicity and manageability. The legitimacy of the system is determined by whether participants are able to responsibly handle their own financial planning.