Low interest rates and the future of pensions

Low interest rates challenge the current system of capital funded pensions. Despite the recent accord on new the pension contract in the Netherlands – making the system more robust to future (interest rate) shocks – the evolution of the interest rate will remain essential to the future of pensions. Low rates over a longer time horizon are bad news for pension fund participants. The lower the return, so much lower pension can be achieved for a given contribution leading to difficult choices to be faced with regard to pension ambition and contribution rates. Some argue that it is better to shift from capital funding to pay-as-you-go financing when interest rates remain low. In this context, in particular, the Notional Defined Contribution (NDC) pensions systems may offer an attractive alternative.

This article was commissioned by Pension Magazine and is published (in Dutch) in the December 2020 issue of this magazine.