Holland’s hybrid: defined ambition

Jan Tamerus, actuary director at PGGM, was instrumental in developing the new Dutch pension defined-ambition structure.

Back in 2006, he was involved in looking at the sustainability of the defined benefit system and in concluding it was not in fact sustainable, the idea of defined ambition evolved.

One of the key reasons for not going to a defined contribution structure is the Dutch social predisposition and, in particular, the focus on intergenerational risk sharing.

“There are two areas we don’t like about defined contribution: the risk sharing, especially the intergenerational risk, and no index targets in the system,” he says, describing defined ambition as conditional defined benefit.

“Our next area of study will be to look at ownership rights, the individual defined contribution way is more attractive to people, but we will see whether we can synthesise from defined ambition to defined contribution, and the only way to succeed in that is to have some solidarity elements in defined contribution.”

Intergenerational risk sharing defined

Tamerus concedes that defined contribution could be a more sustainable system because “you can go with the flow for more individual choices”, but he would like to see defined contribution changed in a way that will have more guidance rules about risk sharing and intergenerational risk in particular. It’s his new area of study.

“In The Netherlands we like intergenerational risk sharing, it’s very important. When we decided defined benefit was no longer sustainable, we looked at going to defined contribution, but there is no intergenerational risk sharing and no target, especially an indexed target, in the contract,” he says. “Those are the two elements why we didn’t want to go to defined contribution, so made defined ambition.

“The defined ambition structure is the same as defined benefit, but we have conditional indexed rights instead of unconditional nominal rights in combination with a policy of indexation. The focus is an indexed pension outcome instead of nominal guarantee.

“By skipping the nominal guarantee, we bring in premium stability and make the contracts shockproof – both elements of defined contribution.

“On the other hand we maintain the intergenerational risk sharing and the income-related target – both elements of defined benefit. Moreover, we make it an indexed target.

“I am very proud of the work but anxious to see it evolve. There is a struggle because some people have commented that we move the risks from the employer to the participants and at the same time take more risks, but that is not the way we will do it,” he says. “In defined ambition, the focus in the investment policy is on stable pension income in real terms,” he says. “Due to the dual focus in the current defined benefit schemes – nominal guarantee as well as an indexation policy – this will not lead to major changes. It is more the liability hedge that should be reconsiderd. Because of skipping the nominal guarantee, the nominal interest rate is less important.”