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Dutch pension reforms target final-salary schemes

Dutch pension reforms target final-salary schemes

 

AMSTERDAM: The Dutch government has published sweeping pension reform proposals aimed at replacing the current system that pays guaranteed retirement incomes based on workers’ salaries with arrangements that impose more risks on employees.

The Netherlands is widely regarded as having one of the world’s strongest and most sophisticated occupational pension systems, so the proposed reforms will be closely scrutinised by many governments that face challenges in paying retirement incomes.

The state-funded flat-rate public pension paid by the Dutch government will remain unchanged under the reforms, which focus on the country’s system of occupational pensions. Most Dutch employees belong to occupational schemes that are industry-wide defined benefit (DB) plans, where incomes in retirement are based on a measure of lifetime average earnings. Under the new arrangements, which are scheduled to come into place in 2020, DB pensions will be replaced by defined contribution (DC) plans, where retirement incomes will depend on savings pots accumulated by individuals throughout their working lives.

In contrast to the UK, where most companies have phased out their final-salary pension schemes, existing occupational DB schemes in the Netherlands will not be closed. Instead, DB assets and liabilities will be transposed into the new DC plans through a transition process. But the reforms will mean that the risk of having an inadequate pension in old age will now sit more fully with individual savers.

Jacqueline Lommen, a senior pensions strategist at State Street Global Advisors, the asset manager, said the Dutch government wanted to introduce a pension system that ensured more fairness between generations.

“The decision to change the design of a pension plan and to transfer the existing DB services will be up to the trustees of each individual pension trust. However, the government intends to support a collective approach that will encourage all pension funds to shift into the new DC arrangements,” said Ms Lommen.

She added that the changes should make Dutch occupational pension funds less vulnerable to fluctuations in interest rates as well as ending requirement for them to maintain solvency buffers to ensure they can pay pension promises.

The Dutch government has indicated that it is willing to provide financial support, including tax changes, to ensure a smooth transition and to minimise any uneven effects across age cohorts and different groups of scheme members. Costs have been estimated at between €25bn and €100bn.