Individual preferences in
the Netherlands
by Wichert Hoekert
1
Summary
Of the three interrelated defining qualities of pensions — certainty,
price and quality — certainty and quality seem most important to
Dutch employees. The vast majority of them accrue pensions in
defined benefit (DB) systems and want to continue doing so. The
preference for DB plans versus defined contribution (DC) systems
is overwhelming. In addition, employees are willing to contribute
more rather than, for example, lower their pension ambitions or retire
later to close the gap between their retirement desires and probable
outcomes. At the same time we find large heterogeneity in demand for
benefits, both in terms of replacement levels and in terms of risk.
1 Wichert Hoekert is a retirement consultant in Amsterdam.
10 | Directions – Individual preferences in the Netherlands
Overview of the Dutch pension system
In the Netherlands, all individuals accrue state pensions
over a period of 50 years, which start being paid out at
age 65. As the state pension is a flat pension — around
12,500 euros in 2009 — the importance of second and
third pillar pensions rises with income. Most pension
plans use the state pension amount as their offset level.
Until a number of years ago, the majority of employees
accrued pensions in a final pay plan based on their
pensionable salary. Today, however, most current plans
are average pay plans offering conditional indexation.
Indexation is usually based on current nominal coverage
ratios — the share of accrued benefits, calculated by
discounting future expected cash flows against swap
rates, covered by assets. A policy ladder determines the
level of indexation. For example, if the coverage ratio is
higher than the required solvency ratio — generally around
120 percent — full indexation is granted. If the coverage
ratio is below the minimum regulatory own funds of
105 percent, there is no indexation. Between these two,
indexation is partial.
This conditional indexation policy shifts a significant part
of pension risk to the employee, which becomes
particularly apparent when lower coverage ratios drive
down indexation, as occurred at the end of 2008. Based
on the recovery plans that have been set up, indexation is
expected to be low in most pension funds for a
considerable period.
Extensive press coverage has focused on the fact that
indexation, always technically conditional but
considered almost certain, was too expensive for most
pension funds at the end of 2008. The bad press
tarnished the image of the Dutch pension system.
Employees are losing their trust in pension funds, while
employers question the sustainability of the system.
Newspaper articles and political discussions focus on
new pension designs. But what features of the Dutch
system do employees value most? While this seems a
logical starting point for these discussions, the
preferences of employees — the beneficiaries of pension
plans — are often overlooked, partly because of the
difficulty of ascertaining their preferences, and
particularly how they value each of them.
These were the circumstances in which the multideck
survey investigated the benefit preferences of
Dutch employees.
As the state pension is a flat pension — around 12,500 euros
in 2009 — the importance of second and third pillar pensions
rises with income. watsonwyatt.com | 11
Profile of respondents
In March 2009, we surveyed
1,521 respondents working for
medium- and large-size companies
(more than 500 employees) in the
Netherlands. After cleaning the
data of unreasonable values, some
1,332 respondents remained.2
The characteristics of the sample
are reported in Figure 2 below.
Although the sample is a fairly
good representation of the Dutch
workforce, the percentage of
employees with no private pension
plan is improbably high. It could
well be that some employees are
not even aware that they participate
in a private pension plan. Most
private pension plans are mandatory,
and the lack of knowledge about
accruing retirement benefits in a
private pension suggests a low
level of pension literacy.
Figure 2 | Summary statistics
Average
Age
39.8
Proportions
Female
39.8%
Married or living with partner
70.8%
Private pension: None
18.7%
Private pension: DC only
7.4%
Private pension: DB only
59.8%
Private pension: DB and DC
14.1%
Source: Watson Wyatt Retirement Preferences Multideck Survey.
The survey was administered during
the financial crisis, which might have
influenced respondents’ risk tolerance
or other preferences. Although we
tried to identify the effects of the
financial crisis by asking respondents
about their post-crisis savings behavior,
we remain uncertain about the
extent to which the crisis affected
their responses.
Survey results
In the midst of the financial crisis,
when coverage ratios were at their
lowest (until now), Bart den Hartog,
head of the Benefits Practice of
Watson Wyatt in the Netherlands,
immediately recognized the
importance of the survey results.
Most private pension plans are
mandatory, and the lack of
knowledge about accruing
retirement benefits in a private
2 We omitted respondents who wanted to retire before
age 50 or after 90, who expected to die before age 65
or after 110, who wanted to contribute more than
30 percent and whose replacement ratios were outside
the range of 15 percent to 200 percent.
pension suggests a low level of
pension literacy. 12 | Directions – Individual preferences in the Netherlands
Dutch employees still prefer secure benefits
and, by implication, sharing the risks
collectively, to a pure DC pension. n
“Workers in the Netherlands
strongly prefer DB pensions and
that they are willing to pay for the
extra security a DB scheme has to
offer over a DC or hybrid scheme.
That is good news for everyone
present; you are not expected
to offer guarantees for free!
Seriously, our research shows
workers want security above
anything else. This is an issue for
those who are responsible for the
content of the pension contracts,
“the social partners,” as they are
called in The Netherlands. That
being said, we have to be fully
transparent about the extent of
guarantees within DB plans and
the price we have to pay to
provide for the security.”3
Figure 3 | Preferred pension systems
Sample distribution by desired risk in pension income
70
66.44%
60
50
% of respondents
At a time when policymakers are
reconsidering the pension system,
and this is what will happen in the
next months in the Netherlands, it is
very important to know what it is that
employees do and don’t appreciate
in their pension deals. He interprets
the survey results as follows:
40
30
24.17%
20
10
0
6.76%
DB
Hybrid 1
Hybrid 2
1.35%
1.28%
Hybrid 3
DC
Source: Author’s calculations based on Watson Wyatt Retirement Preferences Multideck Survey
According to the survey, 66 percent
of all employees want no or very
limited risk in their pension income
(see Figure 3). They want a
guaranteed pension income and a
full DB plan. Less than 2 percent
of respondents favor a DC plan
only. Only around 10 percent of
employees actually accrue pensions
3 Bart den Hartog, “De lessen van de kradietcrisis voor de
pensioenmarkt” (Watson Wyatt Seminar, Netherlands,
April 8, 2009)
watsonwyatt.com | 13
in a DC plan only, but apparently
most of them would prefer a DB
plan. This means that despite all the
bad news in late 2008 and early
2009 about pensions, Dutch
employees still prefer secure benefits
and, by implication, sharing the risks
collectively, to a pure DC pension.
The other 34 percent would prefer a
combined DB/DC approach. Such
approaches hold out the potential for
higher income, but the risks are
greater as well. In fact, most Dutch
employees in DB plans accrue their
on the employee’s age, conditionally
indexed retirement income could be
considered a pension where up to
35 percent is DC and the rest is DB,
assuming indexation is based on
inflation. This means that most Dutch
employees receive a pension that is
comparable to hybrid. According to
our survey, roughly 90 percent of
them would accept a lower expected
retirement income in exchange for
greater certainty.
Many survey respondents are hoping
for more retirement income than their
This multideck approach enables
us to discern the strength of
different preferences, as the
respondents’ choices of what to
change are independent of the
assumptions and defaults.
Moreover, it makes respondents
think more actively about how the
different elements interact. pensions in hybrid-style plans —
combining features of DB and DC
plans. This is certainly the case for
those in collective DC plans. These
plans are designed like DB plans but
contribution levels are fixed, meaning
the employer has offloaded all
investment and longevity risks.
In plans offering conditional
indexation, employees have no
guaranteed retirement income apart
from the nominal basis. Depending
own yearly contributions, expected
retirement age and expected duration
of retirement are likely to deliver.
This in itself is not a very useful result,
especially given that the questions in
this part of the survey weren’t detailed
enough to present precise outcomes,
and the default answers seemed
to influence the initial choices of
the respondents.
The goal of the survey, however, was
not so much to measure the gap
14 | Directions – Individual preferences in the Netherlands
between reasonable expectations
and desires as to find out, in the
event of a gap, what tradeoffs
respondents would be willing to
make. This multideck approach
enables us to discern the strength of
different preferences, as the
respondents’ choices of what to
change are independent of the
assumptions and defaults. Moreover,
it makes respondents think more
actively about how the different
elements interact.
In case of a mismatch between
desired and expected retirement
income or, more precisely, between
desired and expected consumption
replacement rate, respondents are
asked to change their earlier
responses iteratively. The instructions
suggested altering their contribution,
retirement age, risk profile or desired
consumption replacement rate.
There are two sorts of mismatches —
desired retirement income might be
more or less than expected
retirement income. We focus only on
cases where reality is likely to come
up short. Helping underachievers
attain their desired retirement income
should be the primary focus in
changing a pension design. The
problems of overachievers are much
easier to deal with than those of
underachievers. Moreover, the
literature suggests that most people
will undershoot rather than overshoot
their targets.
Strikingly enough, most respondents
choose to change their contribution
rate. Although the percentage of
respondents choosing a higher
contribution rate is not significantly
higher than the percentage more
willing to change their retirement
age — it is the magnitude of the
change that makes the pronounced
difference. Respondents change
their desired retirement age by one
or several months to attain their
... employees are very risk-averse, as they
are willing to pay a considerable price for a
guaranteed retirement income.
desired replacement income, while
those who choose to change their
contribution rate increased it by as
much as 1.6 percentage points — an
8 percent increase from their original
contribution rate.
Even if the additional working months
are expressed as a percentage of
expected time spent in retirement, the
relative change is significantly smaller
than the increase in contribution rates.
The results suggest that employees
are very risk-averse, as they are
willing to pay a considerable price
for a guaranteed retirement income.
Apparently, 42 percent of respondents
would like a guaranteed retirement
income but are neither willing to pay
more nor retire later.
On the other hand, some respondents
are willing to accept greater risk to
bring their expected retirement
income more in line with their desires.
In their final selection, 62 percent of
underachievers opt for pure DB
versus 66 percent at the outset.
Respondents change their original
responses after being shown initial
results, namely their expected
retirement replacement ratio and the
risks involved. The mere fact that
they change their initial answers
indicates they are in a learning curve.
watsonwyatt.com | 15
Into the future
The retirement preferences of
typical employees of medium or large
size companies in the Netherlands
include an annual contribution
of 23 percent of annual pay to
retirement savings, a retirement
consumption replacement rate of
93 percent, a retirement age of
63 and a life expectancy of 87.
In reevaluating the pension system
in the Netherlands, as will happen
in the near future, it is essential to
know what value employees attach
to guaranteed pensions, which are
costly, and how much they are
willing to contribute to receive one.
The same goes for employers. It is
important for an employer to know
what kind of pension promise his
employees want and what it is
worth to them. Employees need
to know what kind of pension they
will receive and its true value as
well. If employees undervalue their
pensions, pragmatically speaking
Figure 4 | Changes to initial retirement choices of “underachievers”
Percentage change
< 30
30—40
Age group
Assuming that the last answers
better reflect what the respondents
value most highly, they become more
aware of their old-age pension and
its cost within minutes. This in itself
is a valuable result of the tool.
40—50
50—60
> 60
−2
0
2
4
Change in contribution rate
Change in retirement age
Change in desired consumption replacement rate
there is little reason for the employer
to offer them. A good understanding
of the pension promise is necessary
for economically sound negotiations
on the pension deal. A survey tool
like the one used in this research can
help achieve this goal in a relatively
straightforward way.
Although guaranteed pensions are
expensive, Dutch employees strongly
prefer them, even when the costs are
taken into account. In his letter setting
out the path for evaluating the current
Dutch pensions system, Piet Hein
16 | Directions – Individual preferences in the Netherlands
6
8
10
12
14
Source: Author’s calculations based on Watson Wyatt Retirement
Preferences Multideck Survey
Donner, Minister of Social Affairs and
Employment, indicates that the aim
of the process should be to enforce
the strongholds of the system, which
are collectivism and solidarity.4 The
results of our survey indicate that
employees share that view.
4 See J.P.H. Donner, Brede aanpak pensioenvraagstukken,
(Ministerie van Sociale Zaken en Werkgelegenheid,
25 May 2009), http://docs.minszw.nl pdf/34/2009/34_
2009_3_13057.pdf (Accessed Sept. 25, 2009)