A conceptual guide to the pension product that the Dutch are moving to from next year from Ross Oxley. I have been trying to get a range of views because today (Tuesday 18th) we are getting a Dutch financial analyst talking with us about the Dutch pension reforms and how they compare with what we are doing.
10.30 am from this link
I managed to get Hockey into this one (just). AI-generated image, imagining happy Dutch pensioners doing what they’re very good at.
A system that used to look like a big defined benefit scheme is being turned into a collective defined contribution scheme with individual pots. It has buffers, risk sharing and what the Dutch call “solidarity”. For anyone used to UK-style Defined Contribution (DC), or Defined Benefit (DB) pension, it is deeply unintuitive, and given that it is often cited as a model for the UK, confusing.
One way to make sense of it is to forget, for a moment, about Dutch legislation and imagine something more familiar: a ladder of target date funds and a simple options overlay.
That is not how the law is written, and it is not how the big funds will implement it in practice. But if you want to understand what it feels like for an individual member, I think this picture is close.
From promises to pots with a buffer
Under the Future of Pensions Act, every new occupational pension in the Netherlands is now some form of collective defined contribution. DB accruals are on their way out, and existing entitlements are being converted into individual capital accounts over the next few years.
In the most popular flavour, the “solidarity” contract1, contributions from all members go into a single collective investment portfolio. The fund then keeps track of each person’s share and allocates returns differently by age, so that younger cohorts carry more equity risk and older cohorts sit in something closer to bonds. On top of that sits a solidarity reserve, built by skimming a fraction of contributions or positive excess returns, up to the limits set by law. That buffer is used to soften the impact of bad investment years on retirees and to share big shocks, such as aggregate longevity risk, across generations.
So the reality is: one big pot, age-based glide paths on paper, plus a buffer that takes a slice of good years and props up bad ones.
Reframe it as a ladder of TDFs
Suppose instead that each member were invested in a ladder of target date funds that start at retirement and mature year by year thereafter.
You are 45, planning to retire at 67. You could imagine a series of synthetic funds labelled “2045 payout, 2046 payout, 2047 payout” and so on, one for each year until your late 90s. When you are 45, the 2045 fund is 22 years from maturity, the 2055 fund is 32 years away, and so on.
Give every one of those synthetic funds the same glide path formula. A long way from maturity, it is heavily in equities. As the maturity date approaches, it steadily tilts towards bonds, exactly as a normal TDF would. That is a convenient way to encode the age-based risk profile that Dutch funds actually apply within the collective portfolio.
Your personal pot is just the sum of the units you hold in all those synthetic funds. As time passes, slices of that ladder mature and pay your yearly pension, inflows from deceased member accounts are transferred into your ladder, and your TDFs rumble on, gradually de-risking. In the example above, ~200k of pension pot would convert into a 2% uplifted 60k-a-year pension for our 45-year-old (when he reaches 67), and the initial allocation is 75% equities, 25% bonds2.
Add a collar to mimic the solidarity reserve
Viewed through the TDF lens, that is very close to putting a one-year collar on the equity component of each fund in the ladder.
Conceptually, think of each TDF doing the following every year:
- On the equity slice, it sells a call a little above the expected path. That is the skim. In payoff terms, you give up part of the upside in good years. In accounting terms, that forgone upside funds the solidarity reserve.
- With the premium from that call, it buys a put a bit below the expected path. That is the top-up mechanism. If the equity piece does badly, the “put” pays out and lifts the fund value back towards the floor. In practice, the Dutch fund would be drawing on the reserve to prevent pension cuts rather than cashing an actual option, but for the member, the effect is similar.
Do that once a year, roll it along the ladder, and the outcome distribution for each synthetic TDF looks like a collar: gains trimmed above a certain level, losses cushioned below another.
The reserve across the scheme is the net result of all those conceptual collars. In good markets, the upside is skimmed into the buffer. In bad markets, the buffer pays out to keep pensions from falling too far.
No Dutch fund is actually trading listed collars on every cohort’s equity. This is a payoff diagram, not an implementation memo.
How close is this to what Dutch schemes actually do?
But if you are trying to understand what it feels like for an individual, the TDF-plus-collar plus redistribution of deceased estates picture is quite faithful.
For someone in mid-career:
- They pay a flat percentage of salary into the scheme.
- That contribution buys them units in their own notional ladder of TDFs. Early tranches already have some bonds; later ones are equity-only.
- Each year, a slice of the equity upside is shaved off to fund a collective buffer.
- In rough years, that same buffer is used to keep their future pension path from being cut.
- Deceased members’ pots are reallocated (or transferred) to everyone else.
For a retiree, it is even clearer. The “maturing” TDF each year has much less equity risk and funds their annuity-like payment. They see increases when markets have been kind and modest cuts when they have not, but the solidarity reserve smooths the path so that retirement income does not jump around as violently as the underlying portfolio.
The main huge benefit of this over just having your own DC pot is the longevity risk sharing. That is sharing the risk that you might live a long time by promising to forfeit your savings to the collective if you don’t. You insure yourself against living to 95 by agreeing that if you die at 72, what’s left of your pot stays in the pool to support other people’s income. This changes the amount required to buy an example of a 2 per cent increasing 60,000-a-year income for life from over 1m to 600k.
Why this framing helps
Most defined-contribution members, in the Netherlands and elsewhere, now default into some sort of life-cycle fund. Many have at least heard of target date funds. A collar is not exotic either: “give up some upside, protect against big losses” is an idea people can grasp.
So, presenting the new Dutch system as:
“A ladder of post-retirement target date funds, rebalanced by age, with a rolling collar on the equity part that feeds a shared buffer”
is not a bad way to explain what is going on.
It makes it easier to answer the questions people actually ask:
- Where does my money go?
- Why am I taking more or less risk than my colleague?
- Why did my pension not go up as much as the stock market last year?
- Why did it not fall as much in the crisis?
The answer, in this framing, is that you are in a sequence of funds that gradually de-risk as they approach the year they pay you, and that you and your fellow members have agreed to give up some of the very good years to avoid being hit as hard in the very bad ones.
The Dutch have built that structure using law, collective agreements and internal allocation rules, not with a grid of actual target-date funds and listed options. But if they ever wanted to make the system more intelligible to members, moving a little closer to the TDF-plus-collar presentation would probably help.
It’s worth emphasising, though, that the outcomes of this new Dutch system are not at all guaranteed. If we just look at the retiree portfolio as I’ve designed it above and then simulate the returns without the collars, you can see how variable that type of relatively conservative glide path actually is for each TDF.
The smoothing mechanism will do a lot of work to keep the outcome close to the target, and given the many moving parts. My toy numbers are likely towards the optimistic end, and they’re based on current UK risk-free gilt curves, which offer much higher yields than the eurozone equivalent, so the Dutch will probably need more capital than I’ve used here.
Notes
There are two contract flavours in the new law – a solidarity premium scheme with a mandatory reserve and a more flexible premium scheme with an optional ‘risk-sharing reserve’ – but the solidarity version is doing most of the heavy lifting, so I’ll focus on that.
These numbers are based on the UK discount curve; they assume a glide path that is based on my own CRRA model. I don’t know how the Dutch are actually doing their glide paths; I expect each scheme is slightly different. If you want to play with the app, you will need to subscribe. Remember, this is an analogy for how the Dutch system works, not how it actually works.
This sounds vastly too complex for 99% of the population to understand. And for the 1%, there is the uncertainty of when they will actually retire or become incapable of further work.
A lot will depend on how this can be explained to people in a way that they can all understand how it works.
One of my AI apps came up with this version for the 99%:
The Netherlands is changing how pensions work.
Until now, most people had a “defined benefit” pension, meaning they knew roughly what they would get each month after retirement.
The new system, called a “defined contribution” scheme, works differently.
You and your employer still pay money into a collective pension fund, but now the value of your pension depends on how that fund’s investments perform. The risk and reward are shared more directly between workers.
In the new setup, everyone in the fund belongs to an “age group,” or cohort. Each group has its own mix of safe and risky investments. The younger you are, the more of your money goes into assets that can grow but also fluctuate in value.
Older participants have a more stable mix because they are closer to retirement and can’t wait out big market swings.
This balance between safety and growth is managed through two main types of returns:
• The hedging return: This is the safer part, based on interest rates and the cost of providing future income. It works like the steady part of your pension.
• The growth return: This comes from investments like stocks and shares, which can rise or fall more—but over time can earn more.
In each year, the pension fund first sets aside enough returns to meet the promised “safe” part for all age groups.
Whatever is left—the extra profits or losses—is divided across all groups according to how much risk each is meant to take.
If your age group has a higher exposure to growth, you share more of this second part; if less, you get less.
Because the pension is managed collectively, the link between what your savings earn and what markets do is indirect.
Your own return doesn’t match the fund’s investment return one‑for‑one. Instead, rules determine how the total return is split up—so that all groups share risk fairly across generations.
Some of your return can even look like “leverage” or borrowing, though in practice the fund uses financial instruments (like interest‑rate swaps) rather than literal loans to achieve this.
For an individual saver, the takeaway is this:
Your pension now behaves more like an investment account whose results depend on both market outcomes and how the collective rules assign those results each year.
Over time, you share in both the ups and downs, with the size of your share depending mainly on your age group’s chosen balance between safety and growth.
This system aims to be fair and sustainable for everyone—but because it spreads market risk differently, your pension income will no longer be guaranteed in advance.
The goal is that, through collective management and careful regulation, the risk‑sharing still protects people from extreme ups and downs while keeping pensions connected to real investment returns.
I think the app works for the more educated and financially literate part of the 99%. The others barely get investment at all and could feel that this scheme is designed to diddle them.