"It’s not a system overhaul"

How do Dutch scientists view the new pension rules? An interview with five of them makes it clear that they unanimously agree on one thing: the changes coming for old-age and survivor pensions are truly necessary.

“If people say: it’s a system overhaul, then I say: it’s not”, emphasizes Professor of Pension Markets Fieke van der Lecq. According to her, it is an adjustment to the pension that employees build up through their employers. “The AOW (state pension) remains. We can still save individually for our pensions, for example, through a bank or insurer. We retain these three pillars. Only the pension through work is changing.” Current rules require larger buffers due to the interest rate and coverage ratios that need to be considered. “Under the new rules, smaller buffers are needed. As a result, our pensions will be more variable”, says Van der Lecq.

There’s nothing wrong with that, according to the professor, although it will take some getting used to, especially in economically uncertain times when investment returns decline. But she anticipates fewer significant shocks than if pensions had to be reduced under the current rules. Pension funds will still maintain buffers, setting aside extra money when the economy is doing well. This will help prevent significant reductions in pension payouts during economic downturns.

A different structure
Marike Knoef, a professor at Tilburg University, says that due to aging, we have become more dependent on financial markets when it comes to pensions. “Relatively speaking, there is a large group of elderly people and a small group of younger people. An adjustment — meaning an increase — in the pension premium paid by participants and employers can no longer mitigate the effects of a negative shock in the financial markets. It’s better to design the system in such a way that we can deal better with uncertainties.”

She explains that under the new pension rules, building up pensions at a young age will count more. “That’s why pensions matter, even when you're young.” Once the new rules come into effect, there will be no more subsidies from younger to older workers. The contributions of young people can grow in value for a relatively long time, and they benefit from this. The contributions of older workers have less time to grow. Once the new pension rules apply, pension funds will be able to assign different levels of risk to different age groups. “This way, it's possible to give the younger generation more risk with a higher expected pension.” Participants who are close to retirement will face less risk, making their pension savings more stable. “This means the peaks will be less high, and the valleys less low.”

More transparency
Theo Nijman, until recently a professor at Tilburg University and specialized in pensionsmanagement, puts it in slightly different words. “Under the current rules, the same premium percentage is paid for everyone, and the same pension accrual applies to everyone. That seems fair, but it isn’t.”

He illustrates this with an example. “If you’re 30 years old and building up your pension, you’re paying too much in economic terms. The premium you and your employer pay for your pension accrual can still generate returns for a long time if you’re young. But for those nearing retirement, this is much shorter. This was never a problem before. The condition was that you remain an employee. Then you’d get it back by age 60, in terms of an average over your entire career. But now we have an economy where people work in the Netherlands for a while, then abroad for a while, or work part-time or become self-employed. There are clearly groups that pay too much or too little in premiums.”

Survivor’s pension
Nijman has also looked at the survivor’s pension in his research. According to the professor, this issue often receives too little attention in discussions about the revised system. While much remains the same, participants must be aware of the changes. “Upon death before the pension date, pension funds currently look at what the employee has built up and what they could have built up if they had continued working until retirement. But if the person, for example, became self-employed, survivors only receive a small portion of the pension built up during the years of pension accrual. But there is still a standard survivor’s pension.” This will soon change. People will have to decide what to arrange for their survivors when they leave their job or retire. If they don’t? In many schemes, nothing will be arranged after a few months.

He gives an example to clarify when this might occur. Consider a pension participant who decides to stop working at age 60, intending to make it until the official retirement date. “If you are no longer an employee and die before retirement, survivors will no longer automatically receive a survivor’s pension. That’s a major change. People need to be aware of this.”

A brilliant invention
Mark Heemskerk, professor of pension law at Radboud University Nijmegen, believes that pensions are a brilliant invention. “A world without pensions is less appealing. Just look at the role pensions play in our welfare state. The government’s AOW is a safety net, and the employer’s supplementary pension provides income security on top of that. That’s the strength of our system, and that remains.”

After the new pension rules are implemented, our pension payouts will fluctuate yearly. Of course, the pension amount primarily depends on the contributions employees and their employers set aside monthly. But pensions will also fluctuate with the economy. This means they will go up or down once a year, depending on how well the pension fund's investments perform. Pension funds will maintain a buffer to limit fluctuations.

Solve problems
University lecturer and researcher Jorgo Goossens (Radboud University) combines his passion for mathematics and econometrics with pension research. He wants to use mathematics to solve problems. “I focus mainly on how much risk pension fund participants want and can handle when it comes to investments.” He began delving into participants' risk preferences during his PhD. This aligns with the role pension funds must take on once the new pension rules come into effect.

“Under the new rules, pension funds must conduct a survey among participants every five years. This is to determine their risk tolerance — meaning, for example, whether they have wealth outside their pension and how much risk they are willing to take.”

He says research shows how people think about risks in certain areas. “When it comes to the broader financial domain or gambling at a casino, they are more comfortable taking risks. But with their pension, they prefer to take fewer risks.”

Better handling of uncertainties
Recent research shows that Dutch retirees are generally more satisfied with their pensions than retirees in other European countries. Seven out of ten retirees in the Netherlands say their pension contributes to their happiness. In countries like Italy, Greece, and Germany, this figure is much lower.

However, there is also some criticism in the Netherlands, especially since some pensions were not indexed during an earlier period. According to Marike Knoef, the new rules no longer require large buffers. “This means indexing can happen more quickly. This is positive for (almost) all retirees.” Therefore, the professor of economics at Tilburg University hopes and believes that the new pension rules will lead to a better sense of security among retirees.