Dutch Pension Funds in Underfunding: Solving Generational Dilemmas

Pension funds in the Netherlands are facing their second solvency crisis within a period of six years. As most Dutch pension funds effectively are arrangements of intergenerational risk sharing, especially the larger sector pension funds, the necessary recovery process implies various generational dilemmas. We distinguish various policy options, among them contribution rate increases and benefit cuts, and compare them on the aspect of intergenerational redistribution. Most pension funds in the Netherlands stem from the 1950s, and the current pension plan setting still reflects standards of that period. This practice is currently at stake. The introduction of a new regulatory framework built upon fair-value accounting and risk-based solvency supervision forces pension funds to reconsider their pension plan design and funding process. We discuss a number of reform proposals that currently are in debate.

How to Close the Funding Gap in Dutch Pension Plans? Impact on Generations

Pension plan sponsors in the Netherlands are facing their second funding challenge in the past decade, this one more severe than the first. Following the economic crash in 2008 - 2009, the funding levels of most plans fell below the 105 % threshold set by the Dutch supervisor, De Nederlandsche Bank, which requires recovery of the minimum funding ratio within five years. It is not yet clear, however, how plans will make up the deficits - except from profiting from a recovery of financial markets - and how the burden of any necessary adjustments will be spread among workers and retirees. Although earlier in the decade most Dutch pension plans were restructured to include automatic reductions in benefit indexation if funding drops below given thresholds, that mechanism may not be enough to achieve recovery this time around. Policymakers now have to consider more substantial measures, including contribution increases and nominal benefit cuts, actions few anticipated would be ncessary.

Een reële oriëntatie van het nieuwe Pensioencontract

Draft texts for the Wet Toekomst Pensioenen (Dutch Future of Pensions Act) often mention maintaining purchasing power but devote limited attention to the risk of inflation. This is hardly surprising because, since the late 1990s, inflation has been very moderate without large persistent shocks. However, for the future inflation risk remains an important risk factor. We investigated various options for hedging against inflation and unexpected inflation shocks in the New Pension Contract. And we assessed the impact of these measures on pension outcomes

Evaluating the Design of Private Pension Plans: Costs and Benefits of Risk-Sharing

The principal purpose of this paper is to analyse the trade-off between the uncertainty in contributions on the one hand and benefits on the other that is embedded in different pension arrangements. The paper employs the funding ratio (ratio of assets to liabilities) and the replacement rate (ratio of benefits to salaries) as key criteria for evaluating the risk sharing characteristics of a private pension plan from the perspective of the plan member. The stochastic simulations performed show that hybrid plans (those in between traditional DB and individual DC) appear to be more efficient and sustainable forms of risk sharing than either of the other two. Of the three main hybrid plans analysed, conditional indexation plans appear to have the greatest potential as sustainable forms of risk sharing. Évaluer la conception des plans de pension privés : coûts et avantages du point de vue du partage des risques Le principal objectif de ce document est d'analyser l'arbitrage entre le degré de certitude (d'incertitude) des cotisations, d'une part, et des prestations, d'autre part, inscrit dans les différents systèmes de pension. Le coefficient de capitalisation (rapport des actifs aux engagements) et le taux de remplacement (rapport entre les prestations et le salaire) sont les critères clés considérés pour évaluer les caractéristiques en termes de partage des risques des plans de pension privés du point de vue de l'adhérent à un plan. Les simulations stochastiques réalisées montrent que les plans hybrides (plans qui se situent entre les traditionnels plans à prestations définies et les plans à cotisations définies individuels) semblent être une forme de partage des risques plus efficiente et plus viable que les deux autres. Parmi les trois grands types de plans hybrides analysés, les plans à indexation conditionnelle semblent les plus aptes à assurer un partage des risques de façon pérenne.hybrid plans, defined contribution, risk sharing, funding, pension benefit, defined benefit, pension fund, fonds de pension, prestation de pension, cotisations définies, partage des risques, capitalisation, prestation définie, plans hybrides