What lessons can the Netherlands learn from abroad when it comes to switching to a new pension system? This question underlies the report that outgoing minister Koolmees received from Netspar. APG's Onno Steenbeek contributed to it. Together with his team, he analyzed similar situations in the US, Denmark, Chile and the United Kingdom, among others. We spoke to him earlier this year about the report. “We can learn a lot from countries such as Chile and Australia once we have switched to the new system, also about what not to do.”
“Unclear” is the verdict of international experts regarding the new Dutch pension system. Steenbeek, Professor of Pension Management at Erasmus School of Economics and Managing Director of Strategic Portfolio Advice at APG Asset Management, learned two things from the discussions with colleagues from other countries. The way in which the Netherlands is reforming the system is unique in the world. But the road to it must be explained transparently and clearly. “Nobody understands why we bother participants with discussions about the discount rate.”
The pension think tank Netspar asked Steenbeek to take the lead in this so-called topicality project. Steenbeek, who, in addition to his work at APG, is also a professor at Erasmus University, sought to collaborate with former chairman of PMT pension administrator Benne van Popta. Steenbeek and Van Popta consulted with colleagues in various countries that have recently undergone substantial reforms of their systems.
Lost a lot of money
Steenbeek: “Canada is often taken as a comparison. It’s a country that’s very close to the Netherlands: they have accrued substantial pension assets that are managed collectively. We can also learn from the way they deal with the self-employed. Countries like Chile and Australia have a lot of experience with defined contribution plans (in a defined contribution plan, the pension contribution is fixed and no firm promise is made about the amount of the benefit upon retirement, ed.) We will be able to learn a lot from them once we switch over to the new system, including what not to do. That also applies to the United Kingdom and the United States. In the UK, for example, we have seen that the option for participants to withdraw their entire pension capital at once has led to undesirable results. Many participants withdrew their entire pension and took it to a commercial assets manager. In this way, they lost a lot of money at great expense. In Chile, many people switched to another administrator because they were given a bicycle. Of course, motivation like that is highly questionable. But in Denmark - where participants were individually asked for permission to switch to a new system - that freedom of choice contributed greatly to the acceptance of the new system.”
Endless discussions to find a solution
What surprised Steenbeek most of all: the transformation that the Netherlands has opted for is simply impossible abroad. In the Dutch plans, we will convert a promise of the amount of the benefits upon retirement (defined benefit plan) into a pot of money that, depending on the financial markets, will provide an uncertain pension benefit in the future (defined contribution plan). This is a complex operation, but according to Steenbeek, that is not the main reason why people abroad do not choose this route. “Most countries allow the old and new systems to continue to exist side by side, because there is no other option. The old system then ends up slowly disappearing. That is far from efficient, because two systems will then continue to exist side by side for a very long time. And that not only increases the costs, it also means a fund will not be able to take as much investment risk in the long term. Ultimately, this is simply at the expense of the amount of the pensions. Unlike in the Netherlands, participants in Anglo-Saxon countries in particular have a financial contract with the fund that cannot simply be changed into something else. The moment you convert their pension rights into pension capital, they’d go to court. It’s different in our country, because we have a social contract with each other. All parties sit down together and sooner or later work out a solution. That will certainly work, but the foreigners are calling on us to do that as transparently as possible.”