Trust the employers and unions to come up with a complicated and opaque new pension plan, writes economist Mathijs Bouman.

The Sociaal Economische Raad (a senior government advisory body made up of unions, employers and lay members) is laying out a soft pillow filled with the downiest of goose down sown up in a sturdy cotton pillow case. It’s  there to cushion the fall for every unfortunate generation whose luck on the stock exchange has run out.

Who fills this miraculous pillow? All the generations whose luck held. Excess investment earnings from one generation go to generations whose shares tumbled. Lucky generations compensate unlucky generations. There’s solidarity among the age cohorts: we have a mutual investment return insurance policy.

Buffer

The buffer for luck and bad luck is an important part of the SER’s recent pension report in which it outlines a new pension system in which workers create their own investment pot. Even considering such an individually tailored pension is a revolutionary step for the union and employer talking shop.

Abolishing the collective pension pots containing all the premiums in exchange for a vague and hardly secure promise of a nominal amount of money upon retirement was something the unions never even wanted to consider. Every adjustment of the system was dismissed as an attack on solidarity.

But now the polder is coming round to the idea that the present system no longer serves. Years of discussion about actuarial interest rates, funding ratios and indexation have shown that the rot has set in and that the ‘best pension system in the world’ is crumbling. So the system has to change. Collective pots become individual pots, underpinned by that huge pillow.

Collective

The pillow is not an individual pillow but a collective pillow. Filled with a downy solidarity tax on the investment returns of those individual pots that are ‘too high’.

The buffer for luck and bad luck is nothing but a shadow pension fund that collects premiums on the investment returns of pension funds. It’s a new collective fund filled with money whose exact ownership is unclear and which will be divvied up based on investment returns expected in a far-away future.

And what will constitute ‘normal’, ‘above average’ and ‘too little’ return on investment? Do I hear someone say ‘actuarial interest’?  The fight between the generations over the money in the pillow will break out before the opening bell of the stock exchange. In the end every age group will consider themselves as the unlucky generation surrounded by generations with all the luck in the world.

Individual pension pots subject to a solidarity tax to fund a collective investment buffer based on arbitrary investment return expectations – those who thought the new system would be simpler and more transparent have reckoned without the SER.

This article appeared earlier in the Financieele Dagblad