The Dutch pension reforms will involve the transfer of all accrued and future DB pension rights to the new DC system, without the consent of the member. “It is by no means certain that each member will benefit” from this transfer, said Aon, the pension consultants. pic.twitter.com/DQNdtfls1Z
— Josephine Cumbo (@JosephineCumbo) May 31, 2023
Governments generally do not tamper with existing pension promises
Yesterday I wrote about the recently announced change in the Dutch pension system that will require millions with a DB promise to exchange it for a DC pot or a CDC pension promise.
It is hard to imagine that this could happen in the UK. Bulk transfers of DB promises to DC pots tend to happen with member consent and when they do , they tend to end in tears – witness BSPS.
Wow just wow. Imagine the FCA thematic review if this happened in UK.
— Alan Francis (@Alanfrancis2812) May 31, 2023
Assuming the flows of money into the Dutch private pension system remain constant before and after this becomes law (July with a corridor for change ending in 2028), then the overall impact of the change will be neutral. But individuals aren’t interested in the overall situation, they want to know what is happening to them.
One leading actuary put the challenge very simply
Surely it is impossible for everyone to benefit, even if everyone gets precisely (on some assumptions) the actuarial equivalent of their DB “promise”?
— andrew young (@glesgabrighton) May 31, 2023
And the next few months will see experts finding case studies where people, through the quirk of numbers, find themselves down on the deal. These will become “causes celebres” and hands will be thrown up in horror.
But it can be done
The idea of “equivalence” is very much in the news at the moment. LCP are proposing that the PPF becomes a longstop providing equivalent benefits to those promised to members of schemes entering it, this appears to be being explored by those in Government who would have DB pensions consolidating into megafunds – capable of helping to refinance the British economy.
The Dutch experiment is now in law and this will surely embolden Governments elsewhere.
And has been done in Britain
The introduction of the single state pension happened in April 2016 after years of planning but relatively little argument. There are many winners and losers from the closure of SERPS and the adoption of a new simpler formula going forward.
While the Government attempted to preserve what had been granted, it too could not control the quirkiness of numbers and winners and losers have emerged. Steve Webb, one of the architect of the plan is busy mopping up the mess that such a huge change inevitably created.
The consent of the Netherlands’ parliament has been all that has been needed for this to go ahead. But such consent in a democracy must be dependent on some awareness of what is going on. If you don’t tell the people, the people get angry – witness Waspi.
I have not seen anyone carrying placards! But my wonderful Reuters colleague @yorukbahceli can tell us more…
— Naomi Rovnick 歐蜜 (@naomi_rovnick) May 31, 2023
So far – there appears to be a consensus behind the reform , quite the opposite of what has happened in France. The Dutch are not stupid , they are – in my experience – generally aware and when they need to be – demonstrative.
We will see what happens in the weeks and months to come.
What about us?
Personally, I think this is something that talks to Britain in a peculiar way. There is a simmering discontent here over the granting of DB pension promises, which creates a pensions apartheid between those with and without them. This is inter-generational and it’s a function of whether you work in the private or public sector. For most people it’s accidental – we don’t choose where we work for the quality of the pension promise thought we are aware that some pensions are better than others.
We do not have, as the Dutch have, a system of conditional benefits where the defined benefit can be defined by market movements. In this country we would call such a pension CDC – but in the Netherlands , the risk sharing is more complex with the formula for who gets what being shared by employer and member in a rather murky way.
This murkiness is being replaced by a more transparent system. This transparent system is in place in the UK, you know what you are getting from a DB pension and it’s not dependent on the markets. You know what you’re getting from DC and it’s an amount paid into your pot.
We now have the apparatus for pension schemes where the amount of pension is determined by the market and we refer to this as CDC.
If the Dutch get consensus behind the new system – which can be DC or CDC (but not DB) then there will be those in the UK who ask “what about us”.
Equivalence – depends on the markets
The idea of equivalence is that we all start out with an equivalent opportunity to what we had before. But where people will end up under this new system will depend on how they are invested and there is no certainty who will win and who will lose. The dial has been shifted so that members take more of the risk, employers less.
If everyone invests in the same way, there should be equivalence of outcomes but that is a fantasy. We know people make choices for themselves and that those who chose for others, do not act in concert. That is why some pensions provide better VFM than others.
Not everyone will find themselves at the top of the league of Dutch pension performers – there will be those at the bottom of the table too. And as the start of the season is now, we will be seeing a lot of comparisons based on “since inception” metrics
How the Dutch react to these “inequalities” will be interesting. It seems to me they have exchanged one set of challenges for another and we will watch on with interest, wondering if we could or should do the same.