According to the Mercer Index of the world’s top rated pension systems, the Netherlands is ranked #2, with only mini-Iceland above it

Mercer describe the Netherlands as having

“a first-class and robust retirement income system that delivers good benefits, is sustainable and has a high level of integrity

So why is its pension system being changed?

Historic moment in the Dutch parliament as Senators vote on major reforms which will sweep aside the defined benefit pension system for all workers – public and private. pic.twitter.com/L8ub7jj43E

— Josephine Cumbo (@JosephineCumbo) May 30, 2023

The key word is “transparency”.

This is how Jo Cumbo reports the very recent changes

Dutch senators have approved a major overhaul of the country’s pension system, which is expected to lead to big changes in asset allocation for the €1.45tn sector.

The new law was passed late on Tuesday after lengthy debate in the senate, the Netherlands’ upper house of parliament.

It means that the country’s occupational pension system will move from a “defined benefit” to a “defined contribution” model in which pension funds no longer make retirement income promises to members.

Instead, members will pay into individual accounts, with income levels more dependent on investment returns and contributions.

Funds can also offer collective DC arrangements, which aim to smooth out investment volatility for individual pension holders.

The deadline for the system to be fully in place is 2028.

The problem the Dutch have with their pension system, one that Mercer do not recognise is that the current system is capable of cutting out younger savers from the benefits older generations currently enjoy.

Posting under the moniker “I will not share my pension with boomers” one commentor on the FT’s article writes

as a dutch person I can tell you that the basic goal of this behind the scene is to stop older generations from purposefully or otherwise misunderstanding what they are owed compared to what they can get, which would stop a movement wishing to keep benefits for old people at the same level regardless of the pains inflicted on young people. Basically It is to protected the young from ever larger forced transfers.

In other words, the young (and old) are prepared to abandon a highly rated pension system because of inter-generational mistrust.

This should come as a lesson to everyone, including Mercer. Black-box solutions, as young Dutch people regard the “DB lite” system in the Netherlands, is simply not trusted.

The pot’s the thing.

At the heart of the change is the establishment of greater property rights on retirement savings. Instead of a benefits promise, savers will have a pot which may or may not offer smoothing and longevity protection through a CDC style mechanism.

You own the pot, you have some control of how the pot is invested and you have options as to how the pot is paid. Nobody has a right to your pot than you, unless you choose to enter a mutual insurance.

What is being given up is a DB system without the rigid certainty of the UK’s DB plans , but without the property rights of our DC system. People seem to prefer a pot , than a defined benefit that’s a bit fuzzy round the edges.

Less certainty – more transparency

DNB, the Dutch Regulator told the FT about the shift to a defined contribution pot system

“In that way, everyone has an overview of the share of the assets reserved for their pension,” it said, adding the new system will give “much less cause for discussion about uncertain promises and about the distribution of these collective assets”.

This will come as a sadness to those in the UK who aspire to be in a society where intergenerational “solidarity” rather than “distrust” drives thinking.

But there are other reasons for the change, not least the way that the current Dutch system is funded. The amount set aside for pensions increases as people get older making older people more expensive to employ. This is also the case in the UK  where  future accrual is going on (think LGPS). This begs the question – “are we more trusting or less aware than the Dutch”

Though in a perfect world of trust, the assumption would be that each generation would accept inequalities of cost – as each would benefit in their turn – the Dutch seem to have lost confidence that this will happen.

Con Keating is scathing about the lazy thinking behind Dutch thinking

The transfer from old to young argument is specious. The old do receive proportionately more for a euro of contribution due to the shorter investment time span of those closer to retirement. But the older also tend to have higher salaries meaning their fixed proportion of wages contributions are in cash terms larger.

But the main point is a simple one – the young will grow older and benefit in the same manner as today’s older members.

Historically I’ve seen the trust issue fermented by DC pension providers keen to get a bigger slice of the pie, but I am concluding that trust has been lost for a reason, even if not a particularly good one. Trust has been lost because DB funds have failed to get their arguments heard and understood. It’s a failure of transparency but a failure nonetheless.

The “own pot” model means that the bulk of the value of saving is loaded towards the younger years of your career , whereas contributions made in the final year are merely “topping up”. This is fine so long as there is a high level of participation and the level contribution rate is high enough throughout. It is fine so long as younger savers don’t make poor investment decisions.

It’s fine so long as everyone is prepared to accept that the greater transparency comes at some operational cost and with the risk that there will be losers as well as winners.

The Dutch have spoken

While there has not been rioting in the Streets of Amsterdam, the social awareness of the pension issue has been high. This “overhaul” is much more nuanced than what has been happening in France, where the work longer argument has been blunt and brutal.

If the Dutch have got this right, the new system, with its uncertainties, may become more loved . Move loved- because of its transparency, the greater sense of ownership it offers and  (by exchanging level  accruals for level contributions) , a  reward strategy incentives that addresses the pension problem of employing the old.

Whether Mercer or the OECD will see this as positive is debatable. It seems to me that this new approach will – to an extent – beggar the neighbour (at least in terms of operational efficiency).

The key thing, as the FT focusses on, will be the impact on asset allocation. Will the change drive better outcomes because the pot approach attracts better investment strategies, or will it lead to people choosing badly or having default strategies fostered upon them , that just don’t work?

We will have to wait to find out.  For now- the Dutch have spoken. They have remade the bed and now they need to lie on it – we’ll only know how sound the bed was after a few thousand sleeps.