Can we better manage the inflation risks in benefits in the new contribution schemes?

Inflation can erode the purchasing power of pensions. The subject is very topical because of the rising inflation, but it hardly plays a role in the proposed new legislation. In a previous Netspar project, the researchers investigated the added value of sharing inflation risk within a fund between active and inactive participants, for example by working with real protection returns.

In this follow-up project we address a number of questions that were not addressed in the previous project. We start with a comparison between the purchasing power of the pension outcomes in solidary contribution agreements with real management and the existing nFTK contracts. We also look at scenario sets in which there is more inflation risk than in the usual sets that have been calibrated for the past 20 years, in which there was hardly any inflation. We use this analysis to determine whether or not the loss of claims in the new pension scheme will lead to better management of inflation risks and greater retention of purchasing power for participants.

We then examine the effects on pension incomes of active people of taking over inflation risks from pensioners and how the answer to that question depends on the extent to which the earning capacity of workers is inflation-proof.

In the second part, we want to go into more detail on the investment policy. What would be the added value of Dutch inflation-related Index Linked Bonds (ILBs) for the purchasing power security of participants? To what extent do ILBs issued by other countries (such as Germany) based on European inflation, provide protection against Dutch purchasing power risks? We also look (if adequate data is available) at the added value of investing in inflation-related asset categories such as infrastructure and real estate.