What are the main characteristics of the retirement market in the Netherlands?

January 24, 2013

Aegon experts from across the company explain the challenges faced by their nations, and how we can work to Transform Tomorrow around the globe.

Most retirement provisions for Dutch workers is still a combination of state pension and employer-sponsored defined benefit pensions, with a shift in recent years away from final salary towards career average plans. There is a small, but increasing, amount of defined contribution saving as well, but defined benefit has remained more stable in the Netherlands than in other countries because of the strong position of pension funds, and the strong support for the plans from the unions.

older woman sitting on steps

Membership of a scheme is often a condition of employment which has added to the sense of solidarity among the public in defense of their pensions.

The Netherlands has already moved to increase the retirement age for both the state pension and workplace pensions from 65 to 67. The increase of the retirement age for the state pension entitlement will start in 2013 with one month per year, and will reach 67 as of 2021, while workplace pension entitlement will be raised to 67 as of 2014.

What are the key challenges facing the retirement market in the Netherlands?

The big challenges are increased longevity and low interest rates. This has put a massive strain on defined benefit pensions with the result that people are now finding that their defined benefit pension entitlements executed by pension funds are not as certain as they thought they were. Pension plans executed by insurance companies are guaranteed as far as the nominal pension rights are concerned.

Since the global financial crisis, incomes have been cut by up to 7%. This ability for schemes executed by funds to reduce pension rights to both retired and non-retired members has been there for decades, but nobody thought it would ever happen. Defined benefit plans executed by funds have to have a 97.5% certainty that they will pay out what was promised. But this is not deliverable over the long term unless interest rates go back up to 4%, and there is no guarantee this will happen.

So we now have a debate between young and old people about the extent to which pension rights should be cut for today's retirees and older workers. For defined benefit plans executed by insurance companies this certainty is 99.5%. Insurance companies are not allowed to decrease pension rights.

But this uncertainty of income creates another challenge – that of raising awareness among the Dutch public that they have to do more to provide for themselves in retirement. Unfortunately, research tells us people do not want to engage with their retirement planning decisions.

In your opinion, what are the solutions to these challenges?

We need to move to a more flexible, defined contribution system where levels of contributions are fixed to give a proportion of salary at retirement, but where the individual carries the risk that pension rights will go up or down if interest rates go up or down.

We are also looking at how the law can be changed so that annuities do not have to give a fixed income, but instead can pay a variable income that can go up with inflation. The individual should have the opportunity to buy more security at his own costs.

How can Aegon best help with these solutions in the Netherlands?

Aegon is doing all it can to lead opinion on how the so-called 'new pension contract' for the nation should be developed. We participate with government departments in working on how legal and regulatory changes can best be managed. We also carry out research - I am a part-time lecturer at the VU University, Amsterdam - to help inform the debate around how to address the challenge of our aging society and to lead the argument towards sensible, effective solutions.