How the Netherlands’ Pension Overhaul Will Affect Asset Allocation
Dutch senators have approved a significant overhaul of the country’s €1.45 trillion pension system, with major asset allocation changes expected. The new law, passed in the upper house late Tuesday, moves the Netherlands’ employment pension system from a defined benefit model to a defined contribution model, no longer promising retirement income to members. Instead, members will pay into individual accounts, with income levels more dependent on investment returns and contributions. Funds may also offer DC Collective Arrangements, which aim to smooth out investment volatility for individual retirees.
Impact on Asset Allocation
“This is a once-in-a-generation event,” said Onno Steenbeek, managing director for strategic portfolio advisory at APG Asset Management, the country’s largest pension fund manager. “I expect some changes in how and to what extent pension funds will use interest rate swaps and currency hedging products.”
With funds no longer able to guarantee a certain level of income to members, financial markets will have a greater impact on outcomes, leading to changes in how pension fund assets are allocated.
The Deadline
The transition to the new system is set for 2028.
Legal Challenges
The legislation faced an attempted block by opposition senators who argued that it required a two-thirds pass of the house, rather than 50%, to be constitutional. Legal experts believe the law will be subject to future legal challenges on this constitutional point.
Response from Pension Experts & Government
Hans Van Meerten, professor of European pension law at Utrecht University, said, “It is difficult to predict whether the new pension system will be better for individuals. There will be some capacity within the system to absorb market shocks, but the DC model is more insecure because it depends more on financial markets for outcomes.”
Pension advisers and De Nederlandsche Bank (DNB), the central bank of the Netherlands, said the reforms make the Dutch pension system more sustainable by freeing up employers from the burden of defined benefit pension obligations, which made it more expensive to hire older workers. DNB also said there will be more transparency about pension savings under the changes.
The changes will also force major changes on the asset companies managing retirement money on behalf of millions of savers. While the focus could be more on total return strategies, “No asset class will exit the portfolio due to changes in the law,” according to Steenbeek.
International Impact
The transition to a new system in the Netherlands will be closely watched by other countries grappling with pensions sustainability, Graham Pearce, senior DB pensions partner at Mercer said. “Under the new system, it will be more attractive to hire older workers,” he added.
Additional Piece:
How Will the Dutch Pension Overhaul Affect the Dutch Economy?
The significance of the Dutch pension overhaul is far-reaching as it affects everyone in the country. The new legislation recognizes that the current Dutch pension system is unsustainable and represents a massive commitment to change. The overhaul addresses the need for greater transparency, more security, and efficiency.
Experts are noting that the new model will create a level playing field, as it enables flexibility for employers to hire and retain older workers, who otherwise can become an economic liability. With an ageing population in the Netherlands like in other parts of Europe, the new system will be more attractive to older workers. Employers will save on costs and sweat capital sitting in the current defined benefit system, resulting in greater investment.
Besides impacting the labor market, the overhaul will affect other areas of the Dutch economy:
Impact on Asset Management Firms: The overhaul will require a new type of asset management that is focused on the “income-generating solutions” that suit the new pension model. Fund managers may offer innovative and customized investment options to support individuals or group accounts that reflect tailored retirement goals.
Impact on Dutch Banks: With the implementation of the new Dutch pension system, pension funds will no longer hold a significant portion of Dutch bonds, which might require Dutch banks to rethink their funding strategies.
Impact on the Dutch Property Market: Real estate has played a vital role in the Dutch pension fund market as pensions heavily invested in Dutch real estate. The reforms might impact the Dutch real estate market; there might be less of a demand for real estate aiming for long-term returns, especially in the residential sector, which could be a setback for the housing market.
Conclusion:
In a country where pension funds hold about 174% of gross domestic product (GDP), the Dutch pension overhaul represents a significant shift with far-reaching consequences for the country and the asset allocation industry. The changing nature of pensions toward a defined contribution model will need to be carefully managed, but the move represents a more efficient and sustainable future for the Dutch pension system. Next up is the implementation of the legislation in practice, which will be a complex process.
The Dutch model could set a precedent and become a model for global pension systems grappling with pensions sustainability.
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Dutch senators have approved a major overhaul of the country’s pension system, which is expected to lead to major asset allocation changes for the €1.45 trillion sector.
The new law was passed late Tuesday evening after a long debate in the senate, the upper house of the Dutch parliament. It means that the country is employment pension The system will move from a “defined benefit” model to a “defined contribution” model in which pension funds no longer promise retirement income to members.
Instead, members will pay into individual accounts, with income levels more dependent on investment returns and contributions. Funds may also offer DC Collective Arrangements, which aim to smooth out investment volatility for individual retirees. The deadline for full system operation is 2028.
“This is a once-in-a-generation event,” said Onno Steenbeek, managing director for strategic portfolio advisory at APG Asset Management, the country’s largest pension fund manager with €541 billion in assets under management. “I expect some changes in how and to what extent pension funds will use interest rate swaps and currency hedging products.”
The legislation survived an attempted block by opposition senators who argued that the new law required a two-thirds pass of the House, rather than 50%, to be constitutional. Legal experts believe the law will be subject to future legal challenges on this constitutional point. It was eventually approved 46 in favor and 27 against.
Hans Van Meerten, professor of European pension law at Utrecht University, said: “It is difficult to predict whether the new pension system will be better for individuals. There will be some capacity within the system to absorb market shocks, but the DC model is more insecure because it depends more on financial markets for outcomes.
Over the past two decades, tens of millions of workers in the Holland have accumulated retirement savings through defined benefit arrangements, which pay a target amount based on salary and length of service.
However, the system had become controversial as retirees and savers suffered cuts in retirement income and increased contributions during a prolonged period of low interest rates, which reduced expected investment returns. Unlike in the UK, the Dutch defined benefit system did not guarantee a certain level of income.
In a reform information De Nederlandsche Bank, the central bank of the Netherlands, said: “Pension funds make promises about the amount of pension benefits they intend to pay to members. However, if returns on investments fall short of expectations, pension funds cannot deliver on their promises. Our system must change to fix these vulnerabilities.”
While there’s no certainty how large pension funds will be under the new system, DNB, which oversees pension funds, said there will be more transparency about pension savings under the changes.
“In this way everyone has an overview of the share of assets reserved for their retirement”, it reads, adding that the new system will give “much less reason to discuss the uncertain promises and 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 due to the DB pension liabilities burdening employers.
The transition of the Netherlands to a new system will be closely watched by countries around the world.
“[Pensions sustainability] it is something many countries are grappling with right now, as we have seen fertility rates fall over the last few decades,” said Graham Pearce, senior DB pensions partner at Mercer, a consultancy firm. “Under the new system it will be more attractive to hire older workers”.
The Senate approval for the review marks the end of a four-year roadmap for reforms first agreed between employers, employees and the Dutch government in 2019, but whose passage through parliament has been subject to numerous delays.
The reform will also force major changes on the asset companies that manage retirement money on behalf of tens of millions of savers.
“No asset class will exit the portfolio due to changes in the law. I imagine the focus could be more on total return strategies, but it’s very hard to tell at this stage,” said Steenbeek.
https://www.ft.com/content/74a8e602-b4a8-4762-938b-ae318932028f
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