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The Netherlands is overhauling its €1.8tn pension system in a sweeping shift from guaranteed payouts to individual investment accounts, a change that could increase payments for up to 11mn savers according to its backers.

Funds with assets accounting for almost a third of the country’s pension system will switch in January from a defined benefit to a defined contribution system, where income fluctuates depending on the performance of the fund.

The transition follows more than 10 years of planning and is designed to make the Netherlands’ pension system sustainable for decades to come as its population ages.

“It’s a unique and profound transition,” said John Landman, chief executive of the country’s second-largest scheme, the Pension Fund for the Healthcare and Welfare sector (PFZW), which switches to the new system on January 1.

“We want the new pension plan to remain collective and include some level of solidarity, next to a more effective adaptation to volatility on the financial markets,” he added.

The transition comes as employers around the world have closed defined benefit pension schemes — where they bear the risk of making up shortfalls — in favour of defined contribution schemes, where individuals bear the brunt of the risk.

The new system includes a form of collectivity for most schemes, so that an individual’s pension assets are not automatically passed to beneficiaries when they die. The Dutch say this move allows for risk to be shared and lets the total pool of assets grow more and pay higher pensions.

“Collective investing helps to generate a high pension income for younger workers and a stable and predictable pension income for older generations and to create trust in the pension system,” said Annette Mosman, chief executive of APG, which manages the assets for ABP, the Netherlands’ largest pension fund.

The transition comes at a time when most Dutch schemes have a large surplus, meaning they have more assets than the amount they need to pay pensions. This allows them to increase current pension payments under the new system, which assigns all assets to the scheme’s members. 

PFZW, for example, is projecting a potential increase in payments of up to 7 per cent after the change is made, although the final figure will depend on its financial position at the time.

Other funds might expect to increase pensions by even more. According to consultancy Aon, the total funding level of the system was 128 per cent in October — meaning that assets were much higher than the amount needed to meet pension obligations.

Not all of the surplus will be passed through in higher pensions, however, as they keep a buffer to smooth pension payments should markets fall sharply. 

The transition is also expected to have a big impact on how Dutch pension funds invest, encouraging them to invest more in risky assets with higher expected returns, and less in debt, held to produce an income in line with pensions owed.

APG estimates the transition could lead to the €1.8tn system boosting investment in private equity and credit investments by about 5 percentage points — or €90bn — over the next five years. 

On the flip side, strategists at Dutch bank Rabobank expect €64bn of long-term sovereign debt will be sold over the course of the transition, which is expected to complete in 2028. 

The Dutch pension system has been the envy of Europe and was rated top in Mercer’s global pensions index this year, assessed across a range of measures including adequacy, sustainability and integrity. 

By 2024, a quarter of the country’s elderly population had a gross annual retirement income above €65,000. Just 4 per cent of pensioners are poor — mainly immigrants who have accrued fewer years of contributions, and the self-employed.

However, some pension experts are concerned that the move to the new system has been too complicated and could lead to errors in the account value that funds show their members. Data quality going back many decades is poor — particularly in sectors with many small businesses that were slow to move to computerised salary systems, such as hospitality.

“The chances of one or two or three of the funds experiencing a serious benefit calculation error are huge,” said Roland van den Brink, former president of the Dutch actuarial society who held senior positions at several big Dutch pension funds.

He added that the average employee and employer contribution into Dutch pension funds was about 25 per cent — much higher than comparable DC contribution rates in the UK or Australia.

Reductions in the contribution rates were “to be expected”, van den Brink said, given the trend of industries to move to the global average, leaving future pensioners “highly vulnerable to inflation”.