Collective Defined Contribution (CDC): Learning from the Dutch
The Dutch pension system is a mythical paradox: on the one hand it is known as the ‘best’ pension system in the world, ranked 1st in the Mercer Global Pension index. On the other hand, few outside the Netherlands understand Dutch pensions.
The essence of Dutch pensions
In common with the UK, Dutch occupational pensions are complex and a challenge for participants and experts to understand. In essence, the Dutch system reflects an attempt to maintain some protections for members when making the switch away from DB to DC. Those familiar with the UK government’s CDC plans will recognise features of the Dutch system in the Government’s plans, in particular the plan to introduce Retirement-only CDC schemes from 2028.
Looking at two key features that distinguish Dutch ‘solidarity’ DC schemes from traditional UK occupational DC schemes:
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Contributions at DB-like levels
In ‘solidarity’ DC schemes the contribution rates are set at a similar level to DB, so whilst the Netherlands has moved away from sponsor guarantees it has done so without the sharp decline in contribution levels typically seen in the UK. Dutch unions have strongly prioritised adequate contribution levels in the negotiations with employers, who in turn were happy to be fully relieved of pension risk.
Moreover, Dutch pensions are paternalistic: there is typically no individual choice for employees about the contribution level, nor is there an opt-out.
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The payout phase is a ‘collective variable annuity’
Dutch DC pensions are lifelong, in striking contrast with many other countries, where the switch from DB to DC has been accompanied by a shift towards drawdowns and lump sums. The Dutch, however, have kept the DB tradition of lifelong pensions, which avoids the key risk of members running out of money if they live longer than expected.
In Dutch schemes, DC pots are automatically converted at retirement into a ‘collective variable annuity’. This is a collective pool of all retirees, where all risks are shared, including longevity risks and financial risks, which allows for post-retirement investment in return-seeking assets.
The collective variable annuity is offered within the same fund as the accumulation phase. Hence no assets must be liquidated at the conversion date, which facilitates the use of private and illiquid assets.
The risk exposure of the collective variable annuities is typically an allocation of 30% to 55% towards a diversified return portfolio. The risk level is determined at cohort-level by participants, via a ‘risk preference survey’.
Lessons learned
Reflecting on the changes
IMPORTANT NOTE
This article is intended for general information only. It does not contain investment, financial, legal, tax or any other advice and should not be relied upon for this purpose. The information is not tailored to any particular personal and/or financial position. For the avoidance of doubt, this paper is not formal investment advice to allow any party to transact. Additional advice will be required in advance of entering into any contract.
The opinions expressed herein are the intellectual property of Mercer and are subject to change without notice.
- Senior Client Adviser, Cardano