The benefits of tailored pension contracts
The new Future Pensions Act (Wet toekomst pensioenen) provides for more tailored opportunities in individualized pension contracts. In his PhD thesis, entitled Individualized pension contracts: risks, welfare losses and investment choices, Bart Dees analyses the welfare gains that can potentially be achieved by tailoring pension contracts to individual preferences. He also gives the pension sector advice with respect to developing pension products. The PhD thesis was realized in collaboration between Tilburg University, insurance and asset management company Nationale-Nederlanden, and pension network Netspar.
Worldwide, pension products no longer necessarily guarantee life-long income. This would make them too costly and therefore less attractive while interest rates remain low. As a result, the pension sectors in many countries have been slowly but surely moving away from collective towards individual pension schemes in recent years.
New Dutch Future Pensions Act
In the Netherlands, major pension reforms are currently under way as part of the new Future Pensions Act, which are to be completed by 2028. Under the new system, the social partners can opt for a solidarity contract or a flexibility contract. In the solidarity contract, risks are shared whereas, in the flexibility contract, people can make more choices to reflect their personal preferences and characteristics.
‘One size fits all’
According to Dees’ PhD thesis, welfare loss with a 'one size fits all' pension contract can be considerable: “The choices that a heterogeneous population is already making imply different optimal pension contracts for different groups. Therefore pension providers can potentially achieve great welfare gains by tailoring pension contracts to individual preferences and characteristics, not only in the accumulation phase but also in the retirement phase.”