Sharing risk: the Netherlands' new approach to pensions

Abstract

AbstractThe solvency crisis in 2001–2004 urged Dutch pension funds to reconsider their final-pay plans with de facto unconditional indexation. Most pension funds switched to an average-wage plan with solvency-contingent indexation. This pension plan redesign was the outcome of a new compromise between the major stakeholders of Dutch pension funds. The redesign is of interest as it results in a hybrid combination of DB and DC. This new setting indeed greatly improves solvency risk management. Moreover, the new plan structure appears to be welfare-dominant compared to other collective plan settings and individual alternatives, as it improves the conditions for intergenerational risk sharing. However, drawbacks of the new plans are the lack of transparency and potential welfare loss for individuals because of the inherent contingent claim structure of the new plan. Moreover, the plan redesign has led to value redistribution from older to younger plan participants.