The Recent Evolution of Pension Funds in the Netherlands: The Trend to Hybrid DB-DC Plans and Beyond
34 Pages Posted: 21 Feb 2007
Date Written: February 21, 2007
According to the classification in official statistics, Dutch pension plans have mainly preserved their DB character in recent years. The dominant reaction of pension funds to the fall in funding ratios at the beginning of this century has been a switch from final-pay schemes to average-wage schemes. This contrasts sharply with the experience in the United States and the United Kingdom, where the fall in pension funding ratios has accelerated the switch from DB to DC schemes.
This paper scrutinizes the recent evolution of Dutch pension plans: how does the evolution of Dutch pension funds diverge from that of Anglo-Saxon pension funds, and how can we explain this divergence? Using an ALM framework, we argue that the current average-wage pension plans may be better viewed as hybrid DB-DC schemes, as indexation of all liabilities has been made solvency-contingent. Because these hybrid plans make use of two steering mechanisms to control solvency risk, Dutch pension funds display a high effectiveness in minimizing the risk of under-funding.
The current hybrid schemes reflect a compromise between the various stakeholders. We examine the institutional basis for this compromise, and contrast this with the situation in Anglo-Saxon pension funds, where primarily employers are responsible for absorbing funding deficits, which gives them in turn more grip on pension plan design issues. In addition, we look at the role of unions, the strong preferences within the Dutch society for collective risk-sharing, and the underlying high level of social trust, as explanations for the divergence with the experience in the US and the UK.
For the longer term, we foresee that Dutch pension plans will shift further towards stand-alone multimember plans, often being called collective DC. This will be accompanied by more differentiation in risk exposure between younger and older members.
Collective risk-sharing will thus remain an important element in Dutch pension funds. In this sense, the evolution of Dutch pension schemes diverges from the developments of Anglo-Saxon pension funds, where risks are shifted more to the individual. Finally, we argue that collective risk-sharing has some important advantages over individual risk-sharing.
Keywords: defined benefit plans, defined contribution plans, the Netherlands, pension funds
JEL Classification: G23, H55
Suggested Citation: Suggested Citation