The Netherlands Central Bank’s recent announcement of cuts of up to 7 per cent in Dutch pensions in payment has highlighted the risks of collective DC structures, say critics.
Dutch pensioners will see cuts in income because funds have achieved lower than expected returns.
At the end of November 2011, 261 Dutch pension funds, totalling 5.1 million active members and 2.5 million retirees, faced funding deficits, according to a statement from the NCB. Funds funded to less than 98 per cent of liabilities, currently around 40 per cent of funds, will be required to cut payouts to pensions. The announcement is seen as significant because the Dutch collective DC system is held up by some pension experts as a potential model for the UK.LCP partner Andy Cheseldine says the cuts show why importing collective DC to the UK is not without risks.
A separate LCP report has also found high charges in some Dutch private pensions, with one in four funds having TERs in excess of 1 per cent. The report found that the projected incomes from pension schemes in the Netherlands are being overestimated by up to 25 per cent, because providers are failing to fully acknowledge the impacts of costs and are issuing overly-optimistic forecasts on benefit expectations, says Evert van Ling, partner at LCP Netherlands and author of the report.
The report also introduced a new measure – the TER+ – which includes all costs relating to an investment fund which may not be included within the traditional TER, such as the insurer’s asset management costs.
Cheseldine says: “The Dutch experience of collective DC, with up to 7 per cent reductions in payments to pensioners shows there is no such thing as a free lunch.
“Collective DC doesn’t reduce risk, it just aggregates and redistributes it. In many circumstances there may be benefits for members from the diversification of liabilities but everyone – providers, advisers, employers and most of all, members need to be aware of the potential risks, which are clearly systemic.
“There are a number of different flavours of collective DC but the ones that get the most airtime -because they claim the biggest financial savings – typically involve cross-generational subsidies in both pre-retirement and post retirement design.”
Van Ling says: “A quarter of the investment funds analysed had a TER+ of 1.0 per cent or more. To put this into context, an increase to the TER+ of just 0.5 per cent could result in a reduction to the final retirement benefit of between 3 and 11 per cent, depending on the number of years an individual has left before they retire.
“This year’s report also shows that the data currently being used by providers to forecast pension payments – as communicated in the Uniform Benefit Statements – can lead to overly-optimistic expectations. As a result, we estimate that members could receive 25 per cent less in retirement than they are expecting.”