What is the value of “collective” in collective DC?

This paper measures how financial shocks – equity market, interest rate or inflation shocks – affect different generations of participants in Dutch collective pension schemes. We show that an
individualized scheme, by using a life cycle investment strategy, can largely replicate the allocation of traded risks across generations of a collective pension scheme. Collective schemes can shift some
financial risk to generations that will participate in the future, whereas individual accounts cannot. In the current institutional setting this shift of traded risk in collective contracts to future generations is limited. Collective pension schemes are able to reallocate non-traded risks among the participants to obtain a more efficient distribution of risk across generations. In schemes with individual accounts, risk sharing is limited to risks traded on financial markets.

Netspar, Network for Studies on Pensions, Aging and Retirement, is a thinktank and knowledge network. Netspar is dedicated to promoting a wider understanding of the economic and social implications of pensions, aging and retirement in the Netherlands and Europe.

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