Optimal design of the Dutch multi-pillar pension system: Lessons from an international comparison

Many countries around the world are striving to build or to reform multi-pillar pension systems. This project aims to learn from best practices in pension systems around the world, focusing on the macroeconomic aspects of pension systems. The project builds on previous research on multi-pillar pension systems, as described in Bovenberg et al. (2012). In the new project the focus is on a comparison of real pension systems, especially in corporatist countries.

Some of the most advanced examples of such systems are found in Australia, Canada, Denmark, the Netherlands and Sweden. Strengths of first-pillar pensions are that benefits are protected for price/wage changes and have a rather low sensitivity for shocks in interest rates and stock prices, while a weakness is its sensitivity to ageing of the population (i.e. the number of pensioners relative to the number of workers). Strengths of second-pillar pensions are low sensitivity to fertility risk and political risk, weaknesses may be its sensitivity to shocks in interest rates and stock prices. The sensitivity of the second pillar to inflation depends on the availability of inflation linked bonds. Collective schemes in the second pillar tend to cope better with macro longevity risk than pensions based on individual DC plans.

This suggests that the optimal size and the design of the second pillar depend on the first pillar and vice versa. Regarding the first pension pillar, countries have made different choices. Canada, the Netherlands and Denmark feature a basic public pay-as-you-go (PAYG) scheme that provides a minimum income to all (Beveridge system). In the Swedish case the objective reaches further and includes the provision of a certain replacement rate (Bismarck system). Regarding the second pillar, the Swedish and Danish model is based on individual defined contribution (DC) plans, with a direct link between the contributions paid and the capital accrued for pension income. The Dutch and Canadian pillar two models, however, feature hybrid systems coming from a defined-benefit (DB) tradition. These pensions are also funded, but the direct link between individual contributions and individual capital accrued does not exist.

The objective of the study is to investigate the performance of different multi-pillar pension schemes under macro-economic and demographic shocks and to draw lessons from an international comparison for the optimal design of a multi-pillar pension system. Firstly, we investigate the effectiveness of different pension schemes in risk sharing of economic and demographic shocks and analyze the welfare effects. Particular attention is given how mandatory pension systems contribute to risk sharing between generations, while at the same time containing discontinuity problems using government guarantees or (collective) buffers. Secondly, we analyze the impact of multi-pillar pension schemes on the economy, e.g. through savings and labour supply decisions. Thirdly, we will explore the optimal level of default settings, e.g. with respect to investment strategy, taking best practices within different countries into consideration. The study will develop further cooperation with partners in Australia, Canada, Denmark and Sweden.

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Netspar, Network for Studies on Pensions, Aging and Retirement, is een denktank en kennisnetwerk, gewijd aan het bevorderen van een beter begrip van de economische en sociale gevolgen van pensioenen, vergrijzing en ‘de oude dag’ in Nederland en Europa.

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