Tailoring Investment Strategies Can Benefit Members, Says Dutch Regulator

Pension fund participants would benefit from investment strategies tailored to their age and risk capacity, a study by Dutch regulator De Nederlandsche Bank (DNB) has concluded.

An age-based, bespoke approach would deliver a higher and/or more stable pension for all participants under all available pension arrangements, DNB’s study found.

Pension outcomes could be boosted by up to 6%, according to the regulator.

The study – available here, in Dutch – was carried out by Damiaan Chen, Maurice Doll and Annick van Ool, and looked at age cohorts within pension fund populations.

DNB said that the study’s outcome confirmed the importance of bespoke investment strategies, as was referenced in the pensions agreement reached between the Dutch government and the social partners in June.

At the time, Wouter Koolmees, the minister for social affairs, said that a tailored investment approach would offer older members increased certainty, whereas younger members would carry the risk required for achieving returns for their future pension.

Investments ‘made to measure’ would also help to reduce tensions between the generations, DNB said.

The current Dutch pensions system does not take into account differences in the risk profiles of different age cohorts, as pension funds deploy a single and uniform investment policy for all age groups.

New models for the Dutch system

The DNB researchers examined both the current pension contract comprising collective accrual of pension rights, the envisaged new contract, and a contract with individual pensions accrual.

In the wake of the agreement between the government and the social partners, a steering group is currently developing two new models for the Dutch pension system.

One of these pension arrangements is to focus on a collective defined contribution accrual method without financial buffers or nominal guarantees. The DNB researchers said that an age-dependent investment approach to this variant would generate an additional pension value of up to 3%.

The other alternative being considered by the steering group is based on individual pensions accrual combined with a collective benefits phase – the option favoured by the Dutch government.

Combined with individual pensions accrual, a tailor-made approach would increase pension outcomes by up to 6%, according to the study.

DNB attributed the benefits to a more efficient allocation of both equity and interest rate risk, which would reduce the exposure of the pensions of older participants to interest rate changes.