The Dutch parliament has approved a major overhaul of the country’s pension system, which is expected to lead to big changes in asset allocation for the €1.45tn sector.
The new law was passed late on Tuesday after lengthy debate in the Senate. It means that the country’s occupational pension system will move from a “defined benefit” to a “defined contribution” model in which pension funds no longer make retirement income promises to members.
Instead, members will pay into individual accounts, with income levels more dependent on investment returns and contributions. Funds can also offer collective DC arrangements, which aim to smooth out investment volatility for individual pension holders. The deadline for the system to be fully in place is 2028.
“This is a once-in-a-generation event,” said Onno Steenbeek, managing director for strategic portfolio advice at APG Asset Management, the country’s largest pension fund manager with €541bn of assets under management. “I would expect some changes in the way and extent pension funds will use interest rate swaps and currency hedging products.”
The legislation survived a blocking attempt by opposition senators who argued that the new law required approval of two-thirds of the House, rather than 50 per cent, to be constitutional. Legal experts believe the law will be subject to future legal challenges on this constitutional point. It was eventually passed 46 in favour and 27 against.
Hans Van Meerten, professor of European pension law at Utrecht university, said: “It is difficult to predict whether the new pension system will be better for individuals. There will be some ability within the system to absorb market shocks, but the DC model is more insecure because it is more dependent on financial markets for outcomes.”
For the past two decades, tens of millions of workers in the Netherlands have built up retirement savings through defined benefit arrangements, which pay out a target amount based on salary and length of service.
However, the system had become contentious as pensioners and savers suffered retirement income cuts and increased contributions during a protracted period of low interest rates, which reduced expected investment returns. Unlike in the UK, the Dutch defined benefit system did not guarantee a set level of income.
In a briefing on the reforms De Nederlandsche Bank, the Netherlands’ central bank, said: “Pension funds make promises about the amount of pension benefits they intend to pay out to members. However, if the returns on investments are lower than expected, pension funds cannot live up to their promises. Our system needs to change in order to fix these vulnerabilities.”
While there is no certainty of how big retirement pots will be in the new system, DNB, which supervises pension funds, said there would be more transparency about retirement savings under the changes.
“In that way, everyone has an overview of the share of the assets reserved for their pension,” it said, adding the new system will give “much less cause for discussion about uncertain promises and about the distribution of these collective assets”.
Investment advisers said the reforms would make the Dutch pension system more sustainable than the old system, which made it more expensive to employ older workers as a result of DB pension liabilities weighing on employers.
The Netherlands’ transition to a new system will be closely watched by countries around the world.
“[Pensions sustainability] is something that a lot of countries are facing at the moment, as we’ve seen lowering fertility rates over the last few decades,” said Graham Pearce, senior partner for DB pensions at Mercer, a consultancy. “Under the new system it will be more attractive to employ older workers.”
The senate’s approval for the overhaul marks the end of a four-year journey for the reforms that were first agreed between employers, employees and the Dutch government in 2019 but whose passage through parliament suffered numerous delays.
The reform will also impose big changes on asset firms managing pension money on behalf of tens of millions of savers.
“No asset classes will fall out of the portfolio due to the changes in the law. I imagine the focus might become more on total return strategies but it is very difficult to say at this stage,” Steenbeek said.
