The ins and outs of the planned new pension system
About 10 years ago, negotiations started to reform the Dutch pension system. The new plans, in which the results of investments will guide the pensions, should be approved by the end of this year. Mary Pieterse-Bloem, Professor of Financial Markets at Erasmus School of Economics and Global Head Fixed Income at the Global Investment Center of the Private Bank of ABN AMRO, is a guest at Buitenhof together with Martin Visser, financial journalist for de Telegraaf, to discuss the new system.
Changes compared to the current system
The Dutch pension system is currently based on three pillars - the state pension (AOW), compulsory occupational pension schemes - either sectoral or company pension schemes - and individual or private pension schemes. Several points of agreement have been reached in the reform discussions. First, the state pension age will rise less rapidly than originally planned and there will be a possibility for early retirement. Second, the reforms aim at sharing the burden of paying pensions more equitably between generations. Occupational pensions will no longer be based on average wage-related contributions, but on the fact that everyone pays the same. The main difference between the two systems is that you are currently working towards an income in the future, on average 70% of what you earned. The new system will work with a methodology in which pensions depend on what the contribution has become on the basis of investment capital. The certainty lies in the deposit of the contribution, after that it's wait and see where the ship runs dry, says Pieterse-Bloem. The new system, just like the current one, remains collective in nature.
Consequently, the responsibility for pensions will increasingly lie with the individual, because the new system is accompanied by uncertainty about how much pension you can count on. This is particularly important for young generation, as they stand at the beginning of their pension accrual. Mary Pieterse-Bloem advises them to check carefully what their pension will yield for them and to make adjustments themselves with their own investments if they feel their pension is too low.
Thought is being given to a big bang transition from the old to the new system in 2027, but before that happens, careful thought must be given to who is entitled to which part of the money and how to compensate the various groups, says Pieterse-Bloem. Retirement is a question of division, but who will gain the upper hand depends on the implementation of the transition to the new system. Pieterse-Bloem expects the middle group to benefit least from a one-to-one transition to the new system. Until halfway through a career, at which point the middle group is now about to find themselves, too much premium is paid. This is normally compensated for in the second half of the career, but this second half will be lost due to the transition to the new system. In order not to disadvantage this group, compensation has to take place in the transition period, says Pieterse-Bloem. She emphasizes that this is a very complex calculation, in which one has to look closely at how everything is redistributed and whereby the moment of transition and the interest rate at that moment play an important role.