Dropping mandatory pension participation could trigger 'bank run'

René van de Kieft, chief executive at asset manager MN, and Roel Beetsma, economics professor at Amsterdam University, have warned of a “bank run” on pension assets should the Dutch government relax rules enforcing mandatory participation in the system. 

In an article for ESB, a communications platform for economists, Van de Kieft and Beetsma argued that dropping the mandatory-participation rule – often suggested in the ongoing debate over the new Dutch pensions system – could be dangerous. 

“If participants, for whatever reason, suddenly lose faith in their pension fund, it suddenly may have to divest assets on a large scale, which could destabilise financial markets,” they said.

They said individual freedom of choice, when drawing on pension assets, should be for specific purposes only, such as buying a house or as a lump sum at retirement.

They warned of similar risks in abolishing mandatory participation at sector schemes, although Beetsma said he did not expect companies would withdraw their pension assets from industry-wide funds “on a whim”.

Restrictions should be imposed nonetheless, they said, allowing companies to switch every five or 10 years only, and then only after giving ample notice. 

In the same article, Van de Kieft and Beetsma said the “rigid application” of interest rates for discounting liabilities could threaten financial stability in times of financial stress.

“A drop in market rates causes funding ratios to fall, which could force pension funds to replace equity with fixed income,” they said.

“This would have a downward effect on markets, interest rates and schemes’ coverage, causing a vicious circle.”

They sought to put this risk into perspective, however, by noting that pension funds based their policies on the average funding over the previous 12 months.

They also have the option of spreading their recoveries from funding shortfalls over a 10-year period.

The authors argued that the regulators’ tendency to prescribe risk-based buffer requirements – such as in the new financial assessment framework, Solvency II for insurers and Basel III – carried the risk of herding, which could increase volatility.

They also pointed to the “potentially procyclical” character of the pensions system.

“During an economic downturn, additional pension contributions could reinforce the crisis because they would reduce the disposable income,” they said.