Let’s Go Dutch – Review of the Dutch Pension

Dutch Pension - Let’s Go Dutch

There has been a lot of press and media coverage over the weekend about the use of Collective Defined Contributions schemes (CDCs) or to put it more simply, those Dutch pensions. There is something expected to be ( definitely will be) in the Queen’s Speech this week so watch out.

So what is it all about and what are the pros and cons? Well, here’s some basic information.

In the UK today there are the guaranteed, final salary schemes (defined benefit) and money purchase (defined contribution) pension schemes. With the former, the employer takes the risk and pays the cost and with the latter, the risk is heaved back on to the individual who generally also bears the expense. The Dutch scheme is somewhere in between.  Instead of individual policies, companies and employees contribute to a huge pot where there are ten of thousands of members. Economies of scale ensue with better value for money.

Risk is diluted as investments are more diversified and returns are smoothed, not dissimilar to a with profits fund. Claims have been have been made of ‘30% better returns’ and when someone reaches retirement, the insurance company administering the scheme will work out how much income individuals  receive based on age, contributions and investment values.

So far so good!

Well it is interesting to note that some in the Netherlands have been calling for a move to UK style pensions due to poor returns! The smoothing mechanisms and calculations, as for with profits, are devilishly complex and left up to actuaries (men in grey suits). You could be enticed in to a scheme with promises of attractive returns only to be left with a shortfall.

Responsibility for your savings pre-retirement and pension income post-retirement is abdicated to the insurance company. Funds are shared by people of all ages and there have been grumbles in the Netherlands from young workers that their savings are being used to subsidise older generations. People of different ages and socio-economic groups may not benefit from their pension funds being lumped together.

More will come out of the woodwork in due course, probably to confuse the public even more. We will do our best to guide you through the minefield as more becomes clear and the fog lifts.