The pensions debate: risk-sharing more difficult, choice within limits
The Dutch government wishes to promote a social debate about possible changes to the pensions system, partly in response to changes within the labor market, demographic trends and ongoing individualization. This discussion will cover several themes. How are the risks to be shared between the various stakeholder parties? Are individual savings and investment plans more likely to achieve a satisfactory pension than the traditional collective arrangements? Is it necessary to introduce greater freedom of choice and offer greater scope for customization? Is the pensions system transparent enough? Is the projected value of a pension in keeping with the investment amount during the accrual phase? In this joint publication, CPB and Netspar do not hold up any one system as being intrinsically better than another. Rather, our intention is to contribute to an informed debate about the future of pension arrangements in the Netherlands.
Some important observations
- Collective contracts have a potential advantage over individual pension plans in that they offer the opportunity to absorb shocks by sharing risks with future generations. This means that collective contracts can adopt a more aggressive investment strategy. Similarly, collective contracts are better able to compensate for fluctuations in inflation or changes in life expectancy.
- However, the opportunities for risk sharing within collective pension contracts are reduced by the demographic trend of population ageing and the increasing flexibility of the labor market. The welfare gains further to sharing risks with future generations are now estimated to be less than one per cent (1%) of consumption. Increasingly, it is the participants in the pension scheme – those who pay the premiums and those in receipt of pensions – who must bear the risks. The essential differences between collective arrangements and individual pension plans are therefore less significant.
- Risk management is becoming ever more important. There must be a careful consideration of which risks are to be shared by all, and which are to be the responsibility of the individual or covered by market products.
- Greater freedom of choice and opportunities to customize retirement plans will allow pensions to be better matched to the personal situation and requirements of participants. However, inappropriate choices will be costly in terms of welfare. Restricting freedom of choice within certain limits, whereby people can choose from a set of standard options, will help to prevent the wrong choices being made.
- Increasing employee mobility and the desire for greater personal control give rise to a demand for more flexibility in pension arrangements. It is important to create a clear correlation between the investment amount and the value of the pension entitlement. The abolition of the ‘average system’ can help to strengthen this correlation.
There are several ways in which the pensions system could be improved. It is, for example, possible to strengthen the existing collective arrangements by making better use of possibilities for risk-sharing, by devoting more attention to individual preferences, by increasing transparency, and/or by reducing unintentional redistribution by introducing a degressive accrual system. It would also be possible to arrive at a more individualized system by introducing personal savings and investment accounts, contributions to which would be mandatory, together with effective distribution of risks over the lifetime of the plan and greater flexibility to allow some degree of customization in line with individual preferences and circumstances.
Download backgrounddocument (PDF document 555 KB) | 16 pages (Dutch only)