AFM: Dutch workers in DC pensions face lower contributions and potential disappointment
According to a survey conducted by the Netherlands’ financial regulator, AFM, pension contributions for Dutch workers enrolled in defined contribution (DC) pension plans are significantly lower than those in defined benefit (DB) plans.
According to a survey conducted by the Netherlands’ financial regulator, AFM, pension contributions for Dutch workers enrolled in defined contribution (DC) pension plans are significantly lower than those in defined benefit (DB) plans. The study examined the pensions of one million workers with a DC plan and found that approximately 65% of them have “limited” contributions of 10% or less, a higher percentage than anticipated.
AFM warns that this finding poses a risk of disappointment for many workers in this group regarding their final pension amounts. The regulator urges social partners to take the study’s conclusions into account when designing arrangements for the new DC pension system, which will be gradually implemented over the next few years. Currently, most Dutch pension funds operate under DB arrangements, but they will all need to transition to DC arrangements between 2025 and 2027.
Of the survey’s 650,000 active DC participants with contributions below 10% of their pensionable salaries, 200,000 were under the age of 30. AFM emphasizes that even for young people, contributions below this threshold result in relatively limited pension accruals, despite the progressive rise in contributions as workers age.
AFM also assessed the utilization of tax deductibility in DC plans and discovered that, on average, participants in DC plans only use 36% of the available fiscal space. In contrast, DB participants utilize 91% of this allowance. The regulator suggests that the new DC system, which permits tax-free contributions of up to 30% of pensionable salaries, may help improve this utilization rate.
In response to AFM’s findings, the trade union federation VCP expresses shock at the significant disparity between DC and DB accruals. VCP advocates for the implementation of a mandatory pension label, similar to an energy label for homes, to provide pension savers with a clear indication of the adequacy of their pension plan.
The Dutch Association of Insurers acknowledges that pension plans with fewer contributions can be safe and cost-effective for participants. However, they recognize the need to manage participants’ expectations better and avoid creating unrealistic hopes.
The introduction of the new DC system may assist in addressing this issue, as it will make it easier to assess and compare schemes based on contribution levels.
The Dutch pension federation views the AFM report as a wake-up call for participants, urging them to carefully review their personal pension statements to determine if they are currently accruing a sufficient pension.