What is a DC pension
bAV: Learn from the Dutch?
A guest contribution by Hans-Peter Bauder, Head of Business Development Pensions at KAS BANK N.V. German branch
When it comes to company pension schemes, the Netherlands is clearly one step ahead in Europe: around 90 percent of all employed people here have a company pension. Almost all companies in the Netherlands offer this pension as standard. Germany is still a long way from achieving such numbers.
As in Germany, old-age provision in the Netherlands is basically based on three pillars. On the one hand the statutory pension insurance (in the Netherlands: AOW), the company pension scheme and the individual private provision. However, the weightings of the individual pillars for old-age security are significantly different from those in Germany. The pay-as-you-go statutory pension is much less important, as in the Netherlands it only provides uniform basic security at the level of the subsistence level, in the form of a basic pension based on the attendance principle (approx. EUR 1,040 for individuals and approx. EUR 1,300 to 1,400 for couples). Consequently, further precautionary measures are necessary for the later protection. The company pension is of the greatest importance here; the private pension, although tax-subsidized, does not even make up 10 percent of the total pension income.
Employee loyalty through company pension scheme
If you ask German employers what discourages them from offering a company pension, the answers are: no interest on the part of employees, high costs, high effort. The first answer in particular is astonishing and contradicts a representative survey by the opinion research institute for a on behalf of KAS BANK. According to this, a company pension plan is important or even very important for 72 percent of German employees when choosing an employer. This placed the company pension in second place behind wages and clearly ahead of other economic components such as capital-building benefits or a company car. Especially for medium-sized companies, this statement is likely to be of no small interest in the competition with large companies for qualified workers.
Wave of consolidation among small and medium-sized pension funds
The same applies to the Netherlands: Costs, effort and the combination of increasing life expectancy, low interest rates and a constant lack of high-yield investment opportunities with a reasonable risk profile are the determining issues. Accordingly, there has been a clear wave of consolidation among small and medium-sized pension funds in the Netherlands, which are usually initiated by the same companies. Their number has decreased dramatically in the past few years. While there were around 800 pension funds in the Netherlands in 2005, their number had fallen to 261 by 2017.
Switching to APFs lower costs
The increasing concentration in Dutch pension funds is accompanied by an expense ratio that is significantly lower than in Germany (more than 20 percent). New vehicles such as the pre-launch APFs (Algemeen Pensioenfonds) enable small corporate pension funds to pool their assets and liabilities in larger, more cost-effective units without giving up their identity and tradition. Experts estimate the savings in administrative expenses by switching to APFs for small and medium-sized pension funds at 30 to 40 percent.
Trend: (C-) DC-based company pension solutions
Even more decisive than the issue of cost relief, however, is the paradigm shift that is associated with APFs or the PPIs (Premium Pension Institutions) that have been on the market since 2011. While the company pension scheme in Germany is still mainly based on a defined benefit (DB) model or what is known as a contribution-based benefit commitment, the Netherlands have expanded their implementation spectrum around pure (collective) defined contribution models (CDC) with PPIs and APFs. ) and thus follow a trend especially in the Anglo-Saxon region. (C-) DC models are characterized by the fact that they waive any guarantees. The basis of the model is only formed by the fixed and paid contributions, which are then managed and invested in the best possible way by an asset manager. Only at the beginning of the pension phase of the company pension scheme member is the capital accumulated up to that point converted into a regular pension payment with the involvement of an insurer. The stormy influx of (C-) DC-based company pension solutions in the Netherlands shows that they hit the nerve of companies and that they have solutions for demographic development and the interest and yield environment.
The differences between Germany and the Netherlands with regard to company pension are great, I could add further examples. In summary, however, it can be said that the different distribution of occupational pension is primarily to be found in the systemic-structural and mentality-related differences between the two countries. This relates above all to the tendency towards higher risk tolerance, combined with a lower need for security and guarantees on the part of the Dutch beneficiaries for capital investments.
VdW info day
Do you want to hear more? At the VdW Info Day on September 7th in Cologne, Bauder will give a lecture on the target pension system, as it is already practiced in the Netherlands. Anyone who would like to exchange ideas with Hans-Peter Bauder at the VdW Info Day can register for the event. The info day is aimed at HR managers and managing directors of companies, IHKs, HWKs and associations as well as the self-employed. The registration process has just started and participation in the event is free of charge.
Image: Hans-Peter Bauder
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