Until recently, the Dutch pension system was held up as an example to the world. But while a couple of generations currently enjoy the benefits, an aging population and low interest rates are starting to shake the foundations.
The Dutch state pension has been around for almost 70 years. And nearly everyone in regular employment in the Netherlands over the age of 25 makes regular contributions to a top up pension with the help of their employer. Through these Defined Benefit schemes pension pay-outs are guaranteed. Or at least they were...
Has Dutch pride in an all-inclusive and solid pension system – until now justifiable – allowed the country to become complacent? Has it failed to notice the profound changes happening in the world? Interim assignments, regular career moves and freelancing have become the norm, interest rates remain persistently low, while life expectancy continues to increase.
Combined, these factors highlight the vulnerability of the Dutch pension system, and disappointed pensioners have had to accept reductions in their once 'guaranteed' benefits as pension schemes' assets drop below permitted levels. At the same time, pension premiums for current members are being increased to make up the shortfall.
Urgent reforms required
Through a spectacular increase in life expectancy and extremely low interest rates, a 'comfortable pension' has become unaffordable. The Dutch pension system in its current form is unsustainable and requires urgent reforms to make it suitable in today's climate.
Politicians have started repair work with caution. For those with a defined contribution retirement pot it's currently compulsory to purchase an annuity immediately at retirement age. With low interest rates this can result in a low pay-out for the rest of a pension-holder's life.
Last month the Senate (Eerste Kamer) proposed a change in law to allow more freedom. Aegon has, based on similar reasoning, been appealing for greater flexibility in the official retirement date for years. "We welcome this change in the law as a positive first step," says Frits Bart, Director of Policy and Relations at Aegon. "As we've seen just this week with suggestions of lowering interest rates in the United States and UK, the risk of even lower interest rates could result in still lower pay-outs over the next years."
Judging by previous changes to the law, this relatively simple intervention has taken a comparatively long time. According to Frits, "for truly future-proof pension systems, much more is required than simply an extra choice for defined contribution schemes."
The cabinet and social partners have been brooding over a new pension system, but continue to return full circle to the existing approach. This doesn't reflect well on the willingness to change in Dutch politics. And is more significant considering the fact that interest rates are not expected to improve substantially in the short or medium term, and life expectancy is not expected to decrease. More importantly, the labor market is expected to become increasingly flexible – a job for life with one employer, in one location is a thing of the past.
Central Bank recommendations
The Dutch Central Bank (DNB) has recently taken a more active interest in the discussion. According to the DNB, individual pension pots and an age-related investment strategy are the foundation stones needed for a sustainable pension system.
From the customer's perspective, Frits says they need clarity and predictability. "Aegon wants to help meet these needs. We believe that everybody has the right to a suitable pension. We work hard developing future-proof solutions, such as pensions based on the premiums available with increasingly advanced life cycles. Through this, we give people the opportunity to make choices about how much they want to save and how they wish to invest.
"In addition, we have high expectations from our new General Pension Fund. Aegon was the first in the industry to receive permission from the Dutch Central Bank for such a fund. This provides us with a unique opportunity to rediscover Defined Contribution schemes, modernize our approach, and act as a catalyst for the necessary changes to the pension system. Most importantly, it allows us to leverage economies of scale in processes and investment, and meet the needs of the customer as efficiently and effectively as possible."
Looking beyond Dutch borders
"In all honesty, many of our innovations were not inspired by the debate currently happening in The Netherlands," says Frits. "We receive valuable input from the Aegon Center for Longevity and Retirement, which carries out one of the largest global retirement studies of its kind, spanning 15 countries. We are also led by experience from other markets where Aegon operates, such as the United Kingdom, which recently completed a fundamental overhaul of pension freedom.
"We can also learn a lot from countries such as the United States, Denmark and Sweden. In these countries, the employees themselves steer and control their own pension planning. This helps us to understand employees (choice) behavior and the challenges they faced during the transition in these countries."
Recent changes in the UK have given retirees more flexibility about what they do with their pension pot at retirement and the timing of any decisions following retirement. Concerns that people would withdraw their pension at retirement and spend it too quickly are so far unfounded. Although recent research showed that around 30% of retirees still weren't aware of the new flexible rules.
Freedom of choice
The recent plea by the DNB for the introduction of individual pension pots and an age-linked investment policy is well timed. People already have freedom of choice when it comes to their energy supplier, their health insurer, or where they want to work. Why then is the choice so limited when it comes to pensions?
One way or the other, the Netherlands also needs to take action. Historically low interest rates can't be held back at Dutch borders, and life expectancy continues to increase. Perhaps most critically, the rapidly changing labor market urgently needs a different approach to pension benefits.
"The Dutch pension system is still among the best in the world, but it's no longer the number one," concludes Frits. "We don't have time for complacency in what is potentially one of the most important socio-economic challenges facing society this decade and beyond."