Defined benefit (DB) pension funds in the Netherlands can achieve 20% better outcomes at retirement than individual defined contribution (DC) plans, according to a study by the Dutch Bureau for Economic Policy Analysis (CPB).

The CPB reached its conclusion after considering the combined effect of extra returns and the hedging of interest risk on liabilities at DB schemes.

At the request of pensions think-tank Netspar, the CPB compared the Social and Economic Council’s (SER) two preferred options for a new pensions contract – collective DB without guarantees and individual pensions accrual with shared investment risk, as well as individual DC contracts without risk-sharing.

Marcel Lever, programme leader at the CBP, said 7 percentage points of the extra return produced by DB plans were due to shared investment risk between current and future generations, which enables DB schemes to take on more investment risk.

He attributed the remaining 13 percentage points to a 25% interest hedge through swaps, on top of the interest cover through bond holdings.

“At individual contracts, it is uncommon to hedge interest risk this way,” Lever said.

He explained that, with interest swaps, pension funds always receive the long-term rate and pay the short variable rate.

“Because the long rate is almost always higher, this construction delivers an additional return of 1.5% on average in the long run,” he said. “In most of our scenarios, a hedge of between 60% and 100% is beneficial.”

Lever said it was still unclear whether an interest hedge would also apply to a pensions contract based on individual accrual with risk-sharing.

“The question is whether all participants with individual contracts could provide sufficient collateral such as AAA bonds,” he said.

In other news, a Dutch court has ruled that the decision of Verloskundigen, the €300m occupational pension fund for midwives, to apply a rights cut of 0.4% next year was not at odds with European legislation.

In the case, brought by a pensioner who had referred to the European Charter for violation of ownership rights, the court concluded that the code did not apply, as there are no European rules for local pension systems.

In the opinion of the court, a violation of the European Convention for Human Rights was not relevant either because the rights cut is covered by local law and is not disproportionate.

Commenting on the ruling, Marlies Bartels, the scheme’s chair, took pains to emphasise that the pension fund had taken a balanced decision, taking the effects for all 3,730 participants into account.

Last month, the funding ratio at Verloskundigen stood at 83%.

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