International Comparison of Pension Systems: Options Could Be Expanded

What can the Netherlands learn from other countries about funded pension systems? That is the central question in this Netspar Brief. Internationally, the role of the government, the social partners, and the individual plan participants varies. This Brief looks at four particular prototypes: the Provident Fund model (Malaysia, Singapore), with heavy government regulation; the Social Partners model (Netherlands, Switzerland, Scandinavia), with a combination of self-regulation by the social partners and regulation by the government; the Regulated Choice model (Australia, Chili), in which the government mandates savings requirements for individual workers and regulates the pension providers; and the Induced Choice model (New Zealand, UK, US), with a great deal of leeway for individual choice combined with standard options (so-called defaults).

A Netspar Brief spotlights certain research findings to bring them to the attention of a wide circle of pension professionals, policymakers and academicians. The point is to supply the building blocks for a well-informed debate on the Dutch pension system. In this new medium, research in the areas of pensions and aging is summarized, with a particular focus on analysis and interpretation. Here you can read the summaries of two Netspar Briefs. The full version of the Netspar Briefs can be found on the Netspar website: www.Netspar.nl

Major findings 

1. Having more options in terms of contributions and payouts in supplementary pension plans would allow participants greater flexibility in spreading out their income and consumption over their lifetime. It could also help in terms of better accommodating their specific circumstances and preferences. Freedom of choice could be expanded by giving participants the option of accruing fewer pension rights or of withdrawing a portion of their pension savings all at once in one lump sum. This freedom of choice would need to be limited to avoid the problem of selection risk and ensure life-time income distribution. Providing more freedom of choice during the savings stage would require eliminating the uniform contribution and accrual system. Having more options in terms of contributions and payouts is important for the Netherlands in part because the mandatory savings levels are relatively high, even given the lower savings limits and sober prospects for indexation.
2. The foreign systems that have freedom of choice are increasingly instituting default options that offer participants help in terms of saving, investing, and drawing down their pension capital. Employees and independent contractors in the Netherlands who are not currently obliged to participate in a collective scheme would be able to be automatically enrolled in a default scheme, such as NEST in the UK. Members would be free to end their enrollment (opt-out).
3. The experience of other countries shows that allowing individual participants complete freedom in choosing pension plans without any further regulation does not always work well. Active involvement on the part of either the government, social partners or employers usually aids in controlling costs and ensuring transparency.

Dutch pension funds share more of the investment risk to future generations than most of the funded pension systems in other countries. While intergenerational risk sharing does occur in some defined benefit (DB) plans, it is rare to unheard of in defined contribution (DC) ones. Countries with DB systems are gradually shifting to DC systems. Part of the policy discussions in the Netherlands include an examination of the advantages and disadvantages of shifting investment risks to future generations.

Text by: Marcel Lever (CPB), Eduard Ponds (APG/TiU), Ryanne Cox (DNB) and Manuel García Huitrón (APG)