"We can learn a lot from other countries, also about what not to do”

What lessons can the Netherlands learn from abroad when it comes to switching to a new pension system? This question underlies the report that outgoing minister Koolmees received from Netspar. APG's Onno Steenbeek contributed to it. Together with his team, he analyzed similar situations in the US, Denmark, Chile and the United Kingdom, among others. We spoke to him earlier this year about the report. “We can learn a lot from countries such as Chile and Australia once we have switched to the new system, also about what not to do.”

“Unclear” is the verdict of international experts regarding the new Dutch pension system. Steenbeek, Professor of Pension Management at Erasmus School of Economics and Managing Director of Strategic Portfolio Advice at APG Asset Management, learned two things from the discussions with colleagues from other countries. The way in which the Netherlands is reforming the system is unique in the world. But the road to it must be explained transparently and clearly. “Nobody understands why we bother participants with discussions about the discount rate.”

The pension think tank Netspar asked Steenbeek to take the lead in this so-called topicality project. Steenbeek, who, in addition to his work at APG, is also a professor at Erasmus University, sought to collaborate with former chairman of PMT pension administrator Benne van Popta. Steenbeek and Van Popta consulted with colleagues in various countries that have recently undergone substantial reforms of their systems.

Lost a lot of money

Steenbeek: “Canada is often taken as a comparison. It’s a country that’s very close to the Netherlands: they have accrued substantial pension assets that are managed collectively. We can also learn from the way they deal with the self-employed. Countries like Chile and Australia have a lot of experience with defined contribution plans (in a defined contribution plan, the pension contribution is fixed and no firm promise is made about the amount of the benefit upon retirement, ed.) We will be able to learn a lot from them once we switch over to the new system, including what not to do. That also applies to the United Kingdom and the United States. In the UK, for example, we have seen that the option for participants to withdraw their entire pension capital at once has led to undesirable results. Many participants withdrew their entire pension and took it to a commercial assets manager. In this way, they lost a lot of money at great expense. In Chile, many people switched to another administrator because they were given a bicycle. Of course, motivation like that is highly questionable. But in Denmark - where participants were individually asked for permission to switch to a new system - that freedom of choice contributed greatly to the acceptance of the new system.”

Endless discussions to find a solution

What surprised Steenbeek most of all: the transformation that the Netherlands has opted for is simply impossible abroad. In the Dutch plans, we will convert a promise of the amount of the benefits upon retirement (defined benefit plan) into a pot of money that, depending on the financial markets, will provide an uncertain pension benefit in the future (defined contribution plan). This is a complex operation, but according to Steenbeek, that is not the main reason why people abroad do not choose this route. “Most countries allow the old and new systems to continue to exist side by side, because there is no other option. The old system then ends up slowly disappearing. That is far from efficient, because two systems will then continue to exist side by side for a very long time. And that not only increases the costs, it also means a fund will not be able to take as much investment risk in the long term. Ultimately, this is simply at the expense of the amount of the pensions. Unlike in the Netherlands, participants in Anglo-Saxon countries in particular have a financial contract with the fund that cannot simply be changed into something else. The moment you convert their pension rights into pension capital, they’d go to court. It’s different in our country, because we have a social contract with each other. All parties sit down together and sooner or later work out a solution. That will certainly work, but the foreigners are calling on us to do that as transparently as possible.”

Evolution

We saw that those discussions can be endless when the new pension agreement was drawn up in 2020. The entire process took more than ten years, and that too has not gone unnoticed abroad. But, says Steenbeek, the question is whether that is a bad thing. “I can understand why people sometimes say that we talk a lot and don’t get much done, but there are few countries that can tackle such a radical and complex reform easily. It is difficult to get the population on board if you do it too quickly. If you want to explain clearly what you are doing and think through carefully what you want to achieve and why, you need time. Moreover, it's not like we're going from an old system to a new one instantly. We had to get used to the uncertainties in the current contract and we have already adjusted the plan in many ways over the past twenty years. So, you can see this as the next big step in an evolution.”

Hard to explain

Another important point that was pointed out to Steenbeek by foreign experts is how to explain the Dutch pension reform. “I noticed that it was difficult to explain where we come from and where we are going with the Dutch system. Some people said, ‘you say that in the current system there was a promise about the amount of the benefit at retirement, but is that really the case?’ And there’s something to be said for that, in the sense that even in the current system, the pension promise is not rock-solid. After all, pensions can only grow in line with current wages if a fund’s financial position allows it. And a number of funds even had to cut their pension benefits. We seem to have forgotten that, because for years there has been no need to cut pensions or to forego adjustment to wage trends.”
People in other countries weren’t immediately sure what to think of the new pension contract either. “Then we'd tell them that we’re going to a defined contribution system, but with collective elements. So, it is not a defined contribution system in the purest sense. But these people did not necessarily take all the aspects we mentioned seriously."

Open door

One piece of advice we got from our foreign colleagues was to be crystal clear about where you are coming from, where you are going and why that is good for the individual participant and for society. That’s a wide-open door, isn’t it? “Of course, but it is still good to be explicitly reminded of that from abroad. In the Netherlands we have a strong tendency to talk in incomprehensible jargon. A word like ‘coverage ratio’ is not used at all abroad, and they don’t understand at all that we bother the participants with discussions about the discount rate. The idea of a ‘parameters committee’ - which I was a member of - that determines returns and risks in pension supervision, was hilarious to them. Apparently, we are not yet sufficiently aware of this. But the transition to the new system can only succeed if it is fully explainable and transparent in terms of what exactly we are going to do, how we are going to do it and why.”

The tricky part

The conversion of the accrued pension rights into pension accounts is the trickiest part of the transition to the new system. Steenbeek: “Foreign experts consider this to be the crucial part as well. If it works, the rest will work too. And then you can’t go back. You have to design and explain the operation in such a way that people see that it is done in an honest and fair way. A British colleague emphasized this more than once: if you do it in such a way that it is difficult to understand, then it is very likely to be very difficult to accept. I hope we’ll be able to do that: explain it clearly. We have to keep our eye on the big picture of what we are doing and not get lost in too many technical details.”

Transparency and explainability seem to be the name of the game when it comes to succeeding in this feat. “If we are open and honest, it will land. It just has to succeed, because there is no plan B,” Steenbeek says.

And if it doesn’t land? “Then we will have lost confidence permanently, I’m afraid.”

This interview is based on a first impression of the advice Steenbeek and Van Popta collected abroad. The final research results are expected by the summer.