Which pension system is best? Lessons learned from the Dutch model

KEY HIGHLIGHTS FROM OUR APRIL 21, 2021 DISCUSSION WITH PROFESSOR ANTOON PELSSER

 

As part of our National Pension Hub Insight series, we were pleased to host Professor Antoon Pelsser on April 21, 2021 who shared highlights from his recent work titled, “Comparison of Pension Fund Supervision”.

During his remarks, Antoon compared the regulation and supervision frameworks of Canadian and Dutch pension systems. He provided an overview of the main features of each system and some of their drawbacks.

 

 

Main Features

 

 

 

 

 

 

 

 

Some drawbacks

 

Dutch Pension System and Supervision

  • Focuses on the short term and market value.
  • Recognizes a three-pillar structure.
  • Dutch supervisor, the Dutch central bank focuses on the nominal funding ratio.
  • Under Dutch law, pension funds use market term structure of risk-free interest rates to discount nominal cash flows back to today.
  • If the funding ratio falls below 104.5%, the Dutch supervisor will request pension funds to make a recovery plan.
  • During the recovery period, pension funds can no longer give any indexation benefit to participants.
  • Dutch system has more “early warning” features.

  • Majority of Dutch pension funds are basically in the red zone due to sustained low interest rates.
  • Calculating funding ratios with market values doesn’t work if the majority of the pension funds get into trouble.
  • Going concern valuation can be fragile as it relies on individual expectations of future investment returns.

 

Canadian Pension System

  • Focuses on going concern type of valuation under the continuity assumption. Pension funds can use expected investment returns on the funds assets to value liability.
  • Unable to have a going-concern deficit nor a solvency deficit. In the case, where a deficit occurs, the sponsor must make special payments into the funds.
  • The distribution of funding ratio concentrates around 100%.
  • In bad economic scenarios, the sponsor must put in extra money, and in good economic scenarios, pension funds can pay out the surplus back.
  • In Canadian system, the sponsor bails out the pension funds

  • More vulnerable as Canadians rely heavily on the sponsor being able to make the special payments.
  • Only effective if the sponsor survives and remains viable.
  • A notification of lower benefits in the Canadian framework only comes after a sponsor has collapsed.

In the end, Antoon described that there are merits in both systems. Under current Dutch pension system reform, the Dutch system is transitioning to a defined contribution style system with some form of risk sharing. The Canadian system protects real benefits in real terms for pension participants, but that debt protection is only effective as long as the pension sponsor survives.

He concluded that the Canadian system may have better performances on average but when the sponsor fails, losses are worse for pension participants.

We invite you to watch the full presentation on Which Pension System is Best? Lessons Learned from the Dutch Model 

Antoon Pelsse
Professor Antoon Pelsser
Maastricht University and the University of Amsterdam

 

Other webinars in our 2021 NPH Insight series include:

  • Sustainable Finance Trends in Pension Fund Investmentswith Rob Bauer, Executive Director, International Centre for Pension Management – Monday, March 22 CLICK FOR EVENT SUMMARY