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.
