How to arrange the pay out of
pensions: Going Dutch
Gaby Schellekens,
Directorate of Industrial Relations
Ministry of Social Affairs and Employment
The Netherlands
Dutch three pillar pension system
1. State pension
2. Occupational pension schemes
3. Individual insurance arrangements
1st pillar
2nd pillar
3rd pillar
Second pillar: Occupational
pension schemes
 > 90% of the employees in the Netherlands
are member of an occupational pension
scheme
 Fully funded schemes
 Contributions tax deductible, benefits taxed
Occupational pension schemes
• Agreed upon between employer and
employee, or between social partners
• Three possible types of pension schemes:
Benefit agreement (= DB)
Premium agreement (=DC)
Capital agreement
• Transparency for the scheme member
Benefit agreement (=DB)
• Agreement on a pension scheme in which the
benefit is set.
• The height of the benefit normally depends on
salary and/or period of service
• Longevity and investment risk belong to the
pension provider
Premium agreement (=DC)
• Agreement on a pension scheme in which the
premium is set
• There are three options:
1. Premium is invested till pension age: longevity risk
and investment risk for the employee
2. Premium is converted in a claim to a capital sum
right away: investment risk for the pension provider, l
ongevity risk for the employee
3. Premium is converted right away in a claim to a
pension benefit:longevity risk and investment risk for
the pension provider
Capital agreement
• Agreement on a pension scheme in which a
capital sum at pension age is set
• The height of the capital depends on period of
service
• Investment risk belongs to the pension
provider, longevity risk belongs to the
employee (firstly at the moment of conversion
of the capital sum into a periodic benefit the
rates are known)
Inflation: Who bears the Risk?
• Depends on the kind of agreement:
- in benefit agreement normally the pension
provider,
- in premium and capital agreements normally
the employee
• But it also depends on the indexation clause
of the pension scheme:
- no legal obligation to index
- part of the scheme rules
Pay-out products in the Dutch
second pillar
• The Pension Act dictates an old age pension
scheme to deliver lifelasting, fixed, benefits
• Therefore every possible type of scheme
(either benefit, premium or capital agreement)
has to pay out lifelasting annuities
• So in the pay-out phase the investment and
longevity risk belong to the pension provider
Pension market
• Legal obligation to put pension capital outside
the company
• Three possibilities:
- Industry-wide pension fund
- Company pension funds
- Life-insurance contract
• Participation in industry-wide pension fund
can be made mandatory
Pension market
• Pension annuities are provided for by either a
pension fund, or by a life insurance company.
(Depends on what is agreed upon between
social partners)
• In the Netherlands there is a strong common
opinion that pension arrangements based on
collectivity and solidairity can realize a higher
level of economic prosperity than individual
arrangements
Pension market
Collective pension arrangements have large
economic advantages:
• Investment risks can be spread between
generations of pension scheme members
• Relatively low administrative costs
• Money can be spent only once, people
themselves probably do not choose to spend it
on individual pension arrangements
Pension market
Disadvantages of collective pension schemes:
• No tailor made solutions
• Lack of individual choice
But in the Netherlands we feel that the
advantages of collective arrangements exceed
the disadvantages
Future “challenges” for the
Dutch second pillar
• Ageing of the population
• Worldwide trend to more individualization
and freedom of choice
• International legislation relating to the field
of pensions
International rules: IAS/IFRS
• IAS leads to a shift from defined-benefit to
defined-contribution occupational pensions.
• In the Netherlands this has resulted in a
specific answer: the collective defined
contribution system (CDC), which is
characterized by properties of both DB and
DC.
Collective defined contribution
system (CDC)
• DC-element: contribution paid by the employer
is fixed during a certain period, in practice for
a minimum period of 5 years.
• DB-element: annual accrual of pension rights
is based on average or final pay.
Collective defined contribution
system (CDC)
• If the contributions are insufficient to finance
the annual accrual, accrual will be lowered
accordingly.
• Financial investments and risks related to the
pension scheme are still met in the pension
fund on the basis of solidarity and collectivity.
Not sure yet whether CDC will be a sustainable
answer to IAS in the view of accountants
Future “challenges” for the
Dutch second pillar
• Pension systems in the EU very different, but
all have the same goal
• “No-one-best-way” to secure the income
position of retirees
Dutch wish for the future
• Recognizing all those possible ways to insure
a decent income for the elderly should play an
important role in the process of designing
international rules in the field of pensions.
• International legislation must reach the
intended purposes, but the good elements of
the different national pension systems should
not be threatened.
Thank you for your attention
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