Reforming Occupational Pensions in the Netherlands: Contract and Intergenerational Aspects

fredag, 13 mai 2022

In the summer of 2020 the Dutch government and social partners have agreed on a pension reform involving the transformation of occupational pensions from the current defined-benefit (DB) based contract into a new defined contribution (DC) contract with some additional collective features. This involves a unique operation as all current DB entitlements—also those already built up—are expected be converted into DC type capital accounts.

With the transition to DC accounts the redistribution due to  uniformity pricing’ that was implicit in the DB contract will be abolished and solvency requirements adjusted. This paper analyses how the transformation affects different  generations. Special attention will be given to the modelling of the collective add-on to the contract (in the form of a solidarity reserve) that aims to strengthen risk sharing among generations. The effects of the reform will be analyzed for three outcome measures: pension results (in terms of replacement rates), market valuation of pensions net of contributions (‘net benefit’), and welfare measured in certainty equivalent consumption (measured through equivalent replacement rates). How the reform impacts different generations proves to be very sensitive to the measure used. There is little consensus neither in economic theory—nor in politics—on what is the best measure. It is sensitive to perspectives, and different traditions in economics focus on different measures. This paper will discuss how economic analysis can still be useful for actual policy making in such a sensitive domain as a pension reform. Finally, by investigating alternative parametrizations of the contract the paper aims to provide insight into the robustness of the results under alternative measures, and on how the new contract could be further improved.