Dutch senators have approved a comprehensive reform of the country’s pension system, which is expected to lead to significant changes in asset allocation for the €1.45 trillion sector.
The new law was passed late on Tuesday after a lengthy debate in the Senate, the upper chamber of the Dutch parliament. This means that the country’s occupational retirement system will move from a “defined benefit” model to a “defined contribution” model whereby pension funds will no longer make promises of retirement income to members.
Instead, members will pay into individual accounts, with income levels based more on investment returns and contributions. Funds can also provide DC group arrangements, which are intended to mitigate investment volatility for individual pensioners. The deadline for fully activating the system is 2028.
“This is a once-in-a-generation event,” said Uno Steinbeck, managing director of strategic portfolio advisory at APG Asset Management, the country’s largest pension fund manager with €541 billion in assets under management. “I anticipate some changes in the way and extent of pension funds’ use of interest rate swaps and currency hedging products.”
The legislation survived an attempted obstruction by dissenting senators who argued that the new law required two-thirds approval of the House, rather than 50 percent, to be constitutional. Legal experts believe that the law will be subject to legal challenges in the future on this constitutional point. He was eventually passed with 46 for and 27 against.
“It is difficult to predict whether the new pension system will be better for individuals,” said Hans van Merten, professor of European pension law at Utrecht University. “There will be some ability within the system to absorb market shocks, but the DC model is not safe because it is more dependent on financial markets to achieve Results “.
Over the past two decades, tens of millions of workers in the Netherlands have built up retirement savings through defined benefit arrangements, which pay a target amount based on salary and length of service.
However, the system became controversial as pensioners and savers suffered cuts in retirement income and increased contributions during a prolonged period of low interest rates, which lowered expected investment returns. Unlike the UK, the Dutch defined benefit system did not guarantee a certain level of income.
In a briefing on the reforms, De Nederlandsche Bank, the Dutch central bank, said: “Pension funds are making promises about the amount of retirement benefits they intend to pay to members. However, if returns on investments are lower than expected, pension funds will not be able to deliver on their promises. Our system needs to change to fix these vulnerabilities.”
While there is no certainty about how large pension funds will be in the new system, the DNB, which oversees pension funds, said there would be more transparency about retirement savings under the changes.
“This way, everyone has an overview of the share of assets reserved for their pension,” she added, adding that the new system would give “much less reason to debate 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 hire older workers as a result of DB pension obligations burdening employers.
The Netherlands’ transition to a new system will be watched closely by countries around the world.
“[Pensions sustainability] “Under the new system it will be more attractive to hire older workers,” said Graham Pearce, senior partner for DB pensions at advisory firm Mercer.
The Senate’s approval of the reform marks the end of a four-year journey for reforms that were first agreed between employers, employees and the Dutch government in 2019, but whose passage through parliament suffered numerous delays.
The reform would force big changes on the asset companies that manage pension money on behalf of tens of millions of savers.
No asset classes will fall out of the portfolio due to changes in the law. I imagine the focus may become more on total return strategies but that’s very difficult to say at this point,” Steenbeck said.