“It remains a challenge to pinpoint what the essence of pension system change is”

Published on: 26 September 2023

Internationally, the Netherlands is causing a stir with its pension reform. And while Onno Steenbeek, Managing Director Strategic Portfolio Advice at APG Asset Management, detects drive and execution power, he also recognizes that a successful renewed system has a number of prerequisites. “Good communication is one of them.”

 

Pension reforms happen all the time in all countries. “That is not surprising, because all pension systems are facing the same challenges to a greater or lesser extent: aging population, rising life expectancy, low real interest rates and returns. It seems that the participant will be paying more for a lower pension that also starts later,” said Steenbeek in response to an article he recently wrote for PensioenMagazine together with Benne van Popta, board member and chairman of the Asset Management Committee of Bpf Detailhandel. “Keep in mind, incidentally, that participation rates in many countries are low and getting lower in response to the costs of aging. The big plus of the system change in the Netherlands is that we have retained the advantages of collectivity; social partners still take responsibility for company-wide or sector-wide agreements and the mandatory system ensures that everyone participates. That still leaves the concern of what to do with the growing group of self-employed workers.”

 

The observations

Steenbeek and Van Popta base their article primarily on the interviews they conducted for the Netspar report “Transition to a new pension contract in the Netherlands: Lessons from abroad,” published in 2021. This report contains a number of observations from major reform projects in other countries. For example, according to Steenbeek and Van Popta, international examples teach that the reform must fit the problem, be technically feasible, be accepted by enough stakeholders and not stand in the way of future adjustments. “In addition, careful communication is crucial to get the changes widely accepted. But the ‘why question’ is not currently being answered by everyone in the same way. Why are we introducing a renewed system? Exactly what problem are we solving with it? What will society notice? How will it affect the participant?”

 

Unique character

The unique character of the Dutch pension reform makes a clear and consistent narrative difficult, he realizes. “The renewal of the pension contract in the Netherlands is moving from a hybrid DB-like construction (defined benefit, defined contribution plan, with a promised benefit amount as the starting point, ed.) to a hybrid DC-like construction (defined contribution, premium plan, where the premium is fixed but the final benefit amount can be variable, ed.). With a different mix of collective and individual elements and risk sharing that appears to be disappearing, but will return in a different guise. In short, the starting point is hybrid and the end point is hybrid, so it is difficult to explain what the essence of the change is.”

 

Dutch citizens are currently finding that communication about the revamped system is challenging, while outsiders have been pointing it out from the beginning. “Different stories are being told about both the initial situation and the final situation of the new pension contract,” Steenbeek and Van Popta say in the article for PensioenMagazine. Nonetheless, Steenbeek said in his supplementary response, he detects drive and execution power. “The industry is doing a lot. And APG even more: it would be nice if we could eventually make APG employees ambassadors for the system change; or that they could at least explain the core message themselves.”

The industry is doing a lot and APG even more

Steenbeek has other concerns, mainly about the difficulty of predicting how financial markets will behave after the transition. “We can do a lot at APG, but we have no control over that. A market correction after conversion is a major vulnerability in the process. Such a shock would have the same impact in the current system, only now the effect on the individual pension situation is hidden behind the funding ratio. In the solidarity contribution scheme, you immediately see the shock in your personal pension pot.”

 

A lot of interest

Despite this concern, and the communication challenges, Steenbeek notes that there is also a lot of interest internationally in everything the Netherlands is currently doing in with respect to pensions. According to Steenbeek and Van Popta, the uniqueness of the Dutch pension change lies in two elements: converting accrual rights into individual pension capital and risk sharing in a collective implementation of individual DC capitals. “The distinctive character is therefore both in the way we deal with former entitlements and in the new pension design. Foreigners will be particularly interested in these two elements. How are they going to fix that? Are they going to fix it? And can that only be done in the Netherlands, or could it be done in other countries as well? Because many realize that you can learn from other countries, but you can’t simply copy other countries’ models. So, the stakes are high for the Netherlands, including internationally. Our partner Festina admires our solution, because in Denmark, the reform towards DC is lacking precisely that collective risk sharing.”

 

Mortuary construction

In the short term, Steenbeek and Van Popta suspect, interest will focus more on conversion. “Because leaving DB rights in a mortuary construction is not seen as ideal even abroad, but because of financial law it is usually the only option. In terms of risk sharing, people are more likely to take the attitude that it won't work in other DC worlds, because a DC plan abroad is seen more as an individual investment product and much less as a pension product.” But, Steenbeek and Van Popta argue, “even for foreigners, it is fascinating and exciting what the Dutch are going to do. The Netherlands owes it to its standing to provide foreign countries with good information broadly and professionally. In this way we can remain a leading country in the field of pension provision.”

 

Read the entire article (in Dutch) by Onno Steenbeek and Benne van Popta in PensioenMagazine. Also read the article we previously wrote in collaboration with Onno Steenbeek about the Netspar report here.