Doorneweerd

The Netherlands has been working on a collective defined contribution pension plan to ensure a healthy pension system. Up until now, workers in the Netherlands have typically been covered by industry-wide defined benefit plans. These plans are administered by boards which include representatives of employers, workers, and retirees. Together with the Dutch social security benefit, these traditional plans are designed to provide a total replacement rate of 70 percent of pre-retirement salary.

The key differences in this collective defined contribution pension plan

In these plans, both employers and employees contribute, but employers bear the investment risk. If investments perform poorly, employers must contribute more, while if investments perform well, employers can contribute less and may even get refunds. In the past years, Dutch employers have started adopting a new type of pension plan. This type of plan looks a lot like a traditional defined benefit pension plan, but differs in one key respect — it shifts both investment risk and longevity risk to plan employees and retirees. This plan is called a “Collective defined contribution pension plan”.

In a Collective defined contribution pension plan, employees earn benefits based on their salaries each year (a “career average” benefit formula). Workers do not have individual accounts as they would in a defined contribution plan in the United States. Instead, the money is pooled for investment purposes, and employees receive benefits solely in the form of a price-indexed lifetime payments beginning at retirement. These plans are structured to provide a similar level of replacement income as traditional defined benefit plans.

The employers and their employees

Employers and employees contribute a fixed percentage of wages to these plans. The percentage is designed to assure generally that the plans are well funded, with a target cushion of 30 percent over-funding. Employers have no additional liability if the investments of the plans perform poorly, and receive no benefit if the investments perform well. The risks of unexpected investment losses and longer than anticipated life expectancy is entirely borne by the employees and retirees as a group.

If a collective defined contribution pension plan suffers investment losses and becomes underfunded, the plan’s governing body, which has representatives of employers, employees, and retirees, decides what adjustments should be made. The adjustments can be an increase in contributions by employees (but not employers) or elimination of cost-of-living adjustments, and, in extreme cases, reductions in the benefits earned in future years. If the plan becomes overfunded, the workers, rather than the employer, benefit.

Can a "collective" retirement plan eliminate the risks of defined benefit pensions and defined contribution plans? https://t.co/BqX4zlMOgf

— Brookings Econ (@BrookingsEcon) December 4, 2016

The advantages of the collective contribution pension plan

A collective defined contribution pension plan has advantages for employers and employees. An advantage for employers is that their contributions are fixed and predictable, while under traditional defined benefit plans their contributions may vary. Also, for accounting purposes employers treat the plans as defined contribution plans, and thus do not have to reflect unfunded liabilities, with their intrinsic volatility, on their financial statements.

Advantages for employees are that they receive adequate retirement incomes for themselves and their spouses and do not have the burden of managing individual accounts. Investment fees and other costs are significantly reduced because funds are invested on a collective basis. Governmental retirement policy goals are also satisfied because the funds are available solely as replacement income during retirement and cannot be used for other purposes during the worker’s working years or as an asset to pass on to heirs.

For more information about these pension plans and further personal information about what may suit you the best please contact us:

Phone:+31206200825

Email: info@doorneweerd.nl

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