Macro Longevity Risk under the New Dutch Pension Deal

After months of negotiation, years of political tension and decades of interdisciplinary research, the Dutch social partners agreed on a pension system reform. The resulting proposed contract allows for more risk taking – in its broadest sense- in employer funded pension plans on an individual level than before. This suggested design, though, comes with challenges on how to allocate the longevity and financial risks among all pension fund participants. I investigate, given this new contract, the implications of systematic longevity risk in the Dutch population on the financial position of pension funds and, consequently, on pension rights of both workers as well as pensioners. After quantifying this risk, I propose a practically feasible way to deal with the faced macro longevity risk using a fund-wide buffer. I find that an adequate buffer policy may help coping with macro longevity risk within a fund.

Keywords: Macro longevity risk, Solidarity, Variable annuities, Pension systems, Buffers