A uniquely generous pension system
Reshaping the second pillar
Going forwards, pension entitlements will be replaced by pension expectations, more closely linked to contributions and financial market outcomes. Let me explain. An annual benefit, which can be adjusted up or
down, will be allocated to the member’s notional account throughout their lifetime, i.e. throughout both the accumulation and decumulation phases. That’s the easy bit. The more complex part is that, based on a system
of age-specific allocation of returns, these benefits will be determined by a combination of fixed contribution payments7 and annual investment returns, adjusted for two factors. These comprise an actuarially-determined
return or deduction, reflecting interest rate movements, and transfers to or from an investment solidarity reserve, which will seek to smooth the intergenerational effects of investment sequencing risk.8 Capped at 15% of total fund assets, and unable to turn negative, this solidarity reserve will be funded by up to 10% of total contributions and 10% of “excess” investment returns, i.e. those generated above a defined threshold return. Of course,
the rules of exactly how and when this reserve can be distributed among the membership will have to be transparently determined in advance. Indeed, from 2026, as part of a very transparent process, members
should be able to compare projected returns by age cohort.
What are the likely asset allocation shifts from transitioning to the NPC?
- Given the age-specific allocation of returns, the emphasis will shift to creating investment strategies that take into account the risks associated with each age cohort.
- Cash flow driven investment (CDI) is likely to take precedence over liability driven investment (LDI), resulting in some traditional hedging assets being sold in favour of shorter-dated credit, though interest rate hedging will remain a cornerstone of investment policy.
- A longer investment timeframe should favour a greater allocation to risk assets and perhaps more illiquid investments, not least to private markets.
So can the Dutch pension system retain its pre-eminent position?
- Adequacy: The current pension benefits formula of seeking to achieve an income replacement ratio of 75% of the median wage for 40 years of contributions and 80% for 42 years will remain unchanged.
- Integrity: Applying investment returns adjusted for interest rate movements and transfers to or from a solidarity reserve to individual notional capital accounts should ensure each member receives a fair asset share throughout the accruals and decumulation phases.