The long-announced pension reform in the Netherlands that will result in all Defined Benefit (DB) pension programs being terminated and converted into Defined Contribution (DC) arrangements has been granted a one year stay of execution. The reform is now expected to be enacted with effect from January 1, 2023.
Although eliminating long term pension liabilities is generally welcomed by employers, the reasons in the Netherlands reflect wider acceptance by the social partners (government, employers and employee representatives) that the global employment landscape is permanently changing, even in the Netherlands. The days of a “job for life” are gone. The new generation of professionals is much more mobile and independent, which is feeding the new “gig” economy. Indeed, one of the concerns of the Dutch government is that many young professionals are working as freelancers or independent contractors, and missing out on occupational pension benefits.
This reform is not taking place hastily. The Dutch social partners have been discussing this reform for more than a decade. The government announcement last month that the implementation of the proposed law would be postponed by up to a year only highlights the practical difficulties involved. The current conditions in the Netherlands – a weak economic environment as employers struggle with the Covid-19 pandemic, historically low interest rates, and fears of a potential stock market correction - are not supportive of the enormous transformation anticipated by the reform. Further delays would not be a surprise, but they would be due to tactical rather than structural considerations.
From a global perspective, the Dutch pension reform is a strong confirmation of the continuing demise of defined benefit plans in countries around the world.
The Netherlands can be considered as one of the last bastions of the Defined Benefit pension model for occupational plans. The vast majority of pension programs in existence in the private sector in the Netherlands are DB arrangements despite a recent trend for new plans to take on a DC format. The Dutch DC plan designs have been obliged to follow an age-related contribution scale to mirror that of a DB plan that starts off with low contribution rates. A traditional DC plan with contributions set as a fixed percentage of pay, such as the one that would be prescribed by the anticipated reform, would build up more pension benefits initially and therefore be better suited for employees with frequent movement from employer to employer.
To put the magnitude of this initiative into a local context, consider that Dutch pension funds hold over US$ 2 trillion in assets equivalent to over twice the country’s GDP, the highest ratio in the world. Only the US and the UK hold more pension fund assets in absolute value, but both countries with significantly larger populations.
Furthermore, the pension system in the Netherlands has maintained the top ranking in the world in the Mercer CFA Institute Global Pension Index. This index is a benchmark of retirement pension systems in a number of countries around the world, with adequacy of retirement income and sustainability of the system amongst the key factors studied.
So why would a country considered as maintaining the best pension system in the world and having resisted moving away from DB pensions for many years now elect such a radical move to fully convert its programs in a short space of time? The unequivocal answer is the gravitational force of the global transformation of the relationship between workers and their employers away from lifetime employment.
Other countries such as the UK and Germany have recently introduced legislation favoring the DC pension model in a bid to make these more attractive. But none send out a message as strong as the Dutch one in terms of where the world of pension benefits is heading.
Next week we offer insights on how the reform will enable multinational employers with Dutch DB pension liabilities to permanently remove them from the books.
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 Formerly Melbourne Mercer Global Pension Index