Formalizing the new Dutch pension contract

Dutch employers and labor unions agreed in 2010 to support a major pension reform.The newly proposed contract replaces suggested nominal guarantees by soft real rights”.The soft real rights are adjusted annually to unexpected real investment returns. In this paper we provide a formalization of this new Dutch pension contract with special emphasis on the market-consistent valuation of the entitlements and the investmentstrategy for the collective that is consistent with the promise made to the participants.For simplicity we restrict ourselves to the case of a closed fund and a single risk factor in financial markets.