Pension Reform in The Netherlands: Attractive Options for other Countries?

Rapid increases in life expectancy, the financial crisis and the lack of trust in financial institutions have raised worries about the sustainability of the pension system in many countries. This paper outlines the reforms that are likely to be implemented in The Netherlands. Pension income will be automatically linked to increases in life expectancy. Pension products that generate nominally guaranteed payments in Euros during retirement are perceived as unattractive for younger participants. Variable annuity contracts will be introduced that insure against the risk of outliving your assets but explicitly link the pension income to be received to the performance of financial markets. Investment risks on shorter horizons are less than for longer horizons, as suggested by habit formation. We discuss the liability driven investment (LDI) strategy that yields the required risk for the individual as well as the Dutch proposal to communicate investment risks in pension provision.
Keywords: Annuities; Life Cycle Investing.
JEL codes: J11; G11; G22.