Should UK go Dutch on pensions

And now that British pensioners can enjoy their lifetime pension savings in bundles of banknotes, rather than having to buy an annuity with the accumulated money, they too might just as well go wilder than a week in Benidorm.

What the UK is considering, as it looks at the best practices of other countries, are the Dutch collective workplace schemes.

Here the individual contributions are pooled into a large pot. This creates economies of scale when investing. They can reach higher returns than other funds investing in bonds since they can invest in longer-term assets, such as transport projects or mortgages, as well. Also, as they do not account for each employee’s individual pension pot, their operational costs are lower.

But the concept is hardly compatible with the flexibility UK individuals have just been given. When a member has no segregated pot of money, what would be the sum he could withdraw?

Holland’s industry-wide schemes have compulsory membership. Their members share the longevity risk with other people in the same profession, and therefore with similar earnings and lifestyles.

There are around 70 of these schemes. The €344bn (£246bn) ABP pension scheme for civil servants is the world’s third largest, coming after the government pension funds of Japan and Norway. The second largest Dutch scheme is for healthcare workers, the €162bn (£116bn) PFZW scheme. There are also pension funds for the one-million workers in the metal and engineering industry (PMT), for those working in the building sector (BPF), in the retail sector (Detailhandel) and in private road transport (Vervoer).

The number of industry-wide funds remains the same, while the number of company pension funds – think of Dutch giants such as the Royal Dutch Shell, ING or Phillips – shrank from 957 in 1997 to 254.

Insurance companies complain that these industry-wide pension funds are oligopolies that are difficult to compete with

The Dutch in general are tall people, which they proudly attribute to eating lots of Gouda and Leerdammer. Yet until this year, most of those working in the dairy sector had no industry-wide pension fund themselves. Only Campina – the largest milk sector company – had previously accrued a pension right – in a €1bn (£720m) defined benefit pension fund.

All the other dairy companies had individual pension arrangements with insurance companies for their employees, until they became too expensive. The employers decided to set up the collective BPZ, offering a defined contribution arrangement.

Equally, the 15,000 workers and 1,200 employers in the wholesale flower and plant sector were among the last to get their collective DC scheme, in 2007. Until then they too had personal arrangements. Yet what other cliché pops into your mind when thinking of the Netherlands? Tulips.

However, insurance companies complain that these industry-wide pension funds are oligopolies that are difficult to compete with. And although the pension system of the Netherlands has long been the envy of the world, it is ripe for reform.

Cross-subsidisation between the generations fired up big debates when the actuaries needed to decide on payout rates after the financial crises. The funds suffered severe losses on their investment assets in the market downturn and the historically low interest rates increased the present value of their future pension payout liabilities. This combination sent the robust Dutch funding ratios plummeting – below 100 percent for some funds – in which case Dutch legislation required the pension payments of the already retired to be cut, something that had not happened since the Second World War.

The trade unions – whose members are generally aged over 40 – were pushing towards loosening the regulatory standards, using a higher discount rate when calculating the liabilities, and hoping that future investment returns would make up for the losses – effectively putting the burden onto the younger generations.

Returning to today, many complain that the collective solidarity works as a black box. Last year saw the launch of the National Pension Dialogue, aiming to find the middle ground between the traditional model of a collective and the modern need for transparent accrued rights and freedom of investment choice. That is, trying to combine personal pension assets with collective risk-sharing.

Also, current trends in the labour market call for a clearer definition of individual accrued rights. The flexible labour contracts, labour mobility, gaps in pension careers, and a rising number of self-employed require the accumulated assets to be portable. So naturally, there is an inherent development towards defined contribution.

Holland’s pensioners enjoy bigger pensions than those in the UK, but mainly because Dutch workers contribute more than 20 per cent from their salaries.

Unlike in the UK, enrolment into the pension savings system is compulsory for the Dutch, as part of their employment contracts. They cannot opt out. But the annuity market in the Netherlands is small, as most of the plans are still DB schemes, and it has just started growing with the newly set-up DC schemes.

To move from DB to DC, you have to get the unions to agree to do away with guaranteed benefits.

Also, pension regulation is political, and consequently political parties like to exploit it for their own purposes. The sudden access to pension pots in the UK, for example, was a typical vote winner. In Holland, the general election in 2016 will be the catalyst for reforms.

Annuities are just as unattractive in the UK as elsewhere. The current record-low bond yields plus increased life expectancy have pushed annuity rates down to historic lows: from around 15 per cent in 1990 to 5 per cent today in the UK. Annuity rates are even lower in the Netherlands, as the British annuities are based on the gilt rate, while the Dutch insurers buy Dutch government bonds.

People are reluctant to buy annuities voluntarily, as in most cases, the received annuity payments will be less than the savings put in. Buying an annuity is good value for money only for those who outlive their life expectancy, so investing in your health and living happily ever after retirement needs to be a strategy.

Maria Sovago is a freelance journalist

Key points

Dutch pensioners make the best of their retirement years by globe-trotting.

What works well in Holland are the industry-wide schemes with compulsory membership.

The pension system in the Netherlands has long been the envy of the world, but it is ripe for reform.