Sharing Risk: The Netherlands' New Approach to Pensions

Posted: 9 Mar 2010

See all articles by Eduard H.M. Ponds

Eduard H.M. Ponds

Algemene Pensioen Groep (APG); Tilburg University - Department of Economics; Netspar; Tilburg University - Center for Economic Research (CentER)

Bart van Riel

Government of the Netherlands - Social Economic Council

Date Written: April 1, 2007

Abstract

In response to the perfect storm of falling stock returns and interest rates that hit pension funds in 2000, many companies in the United States and the United Kingdom have shifted from defined benefit (DB) to defined contribution (DC) schemes. In contrast, Dutch pension plans have mainly preserved their defined benefit character in recent years, although they have switched from "final-pay" to "average-wage" schemes. The average-wage plans may be better viewed as hybrid DB-DC schemes. They are like DB plans in that accrued pension rights are based on an employee's wages and years of service, and contribution rates can be raised in response to a funding shortfall. They are like DC plans in that the annual indexation factor, which is applied to both the accrued rights of active workers and the benefits of retired workers, is tied to the fund's financial status and, therefore, investment returns. As a result, these hybrid plans have two mechanisms - contribution rates and indexation - to control solvency risk, effectively minimizing the risk of under-funding.

Suggested Citation

Ponds, Eduard H.M. and van Riel, Bart, Sharing Risk: The Netherlands' New Approach to Pensions (April 1, 2007). Available at SSRN: https://ssrn.com/abstract=1116360

Eduard H.M. Ponds (Contact Author)

Algemene Pensioen Groep (APG) ( email )

P.O. Box 75283
Amsterdam, 1070 AG
Netherlands

Tilburg University - Department of Economics

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Netspar

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Tilburg University - Center for Economic Research (CentER) ( email )

Tilburg

Bart Van Riel

Government of the Netherlands - Social Economic Council ( email )

United States

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