Reforming the Dutch pension system to ensure sustainability

Abstract

The Netherlands is on the brink of reforming its system of occupational pensions as part of a more general reform of its three-pillar pension system. This reform features important changes to first pillar pension benefits. The focus of this article is however on the coming reform of occupational pensions, the second pillar of the system, which concerns both pension contributions and benefits. This reform is related to a series of reforms that have gradually transformed the pension contract that was dominant 20 years ago, a final salary defined benefit contract, into a collective defined contribution contract. We argue that these reforms are a response to changes in the external environment, such as population ageing and a secular decline of interest rates. The coming reform responds to the call for a pension scheme that is more individualistic, more closely connected to the labour market, and which does not share interest rate risks between generations. The New Pension Contract remains in part collective, since the assets of participants are invested collectively, and a mandatory solidarity fund can be used for intergenerational risk sharing.