De Nederlandsche Bank

Research Department / Monetary and Economic Policy Department

Pensions and public opinion: a survey among Dutch households P.J.A. van Els, W.A. van den End and M.C.J. van Rooij Research Memorandum WO no 752 / Meb-Series no 2003-18 December 2003

Research Memorandum WO no 752/0341 Meb-Series no 2003-18 December 2003

De Nederlandsche Bank NV Research Department / Monetary and Economic Policy Department P.O. Box 98 1000 AB AMSTERDAM The Netherlands

PENSIONS AND PUBLIC OPINION:

a survey among Dutch households

P.J.A. van Els, W.A. van den End and M.C.J. van Rooij *

* We would like to thank R.B.M. Vet for excellent statistical support. Views expressed are those of the individual authors and do not necessarily reflect official positions of De Nederlandsche Bank.

ABSTRACT

Pensions and public opinion: a survey among Dutch households

P.J.A. van Els, W.A. van den End and M.C.J. van Rooij

This paper reports on the findings of a survey among Dutch households (as part of the DNB Household Survey in 2003) about many aspects (expectations, concerns, attitude and preferences) of their pensions and the old-age-arrangements in the Netherlands. We explore whether the outcomes are related to specific financial and non-financial household or personal characteristics. A clear majority of the Dutch public expects public pension schemes to be retrenched and rejects reforms that infringe on what they regard as acquired rights. One would rather like to pay higher contributions until the age of 65. The divergence in preferences towards retrenchment measures across generations indicates that intergenerational risk sharing is not something natural. The public prefers to have their pension build-up managed by pension funds and would accept having to pay higher contributions in exchange for guaranteed benefits. Yet, a substantial minority advocates a greater freedom of choice. Surprisingly, this preference for freedom is not linked to particular household characteristics, nor does it reflect the particular interest of those who already have third pillar pension provisions. Many, however, are as yet not concerned about their pension rights, adopting a “we’ll see about that when we come to that” attitude. This manifests itself in a substantial lack of knowledge about one’s own personal pension arrangements, notably for young generations, women, low-skilled workers and people out of work.

Key words: public pensions, second pillar pensions, household survey, risk attitude and preferences

JEL codes: D12, J26, G23, H55

SAMENVATTING

Pensioenen en publieke opinie: een enquête onder Nederlandse gezinnen

P.J.A. van Els, W.A. van den End en M.C.J. van Rooij

Dit rapport presenteert de bevindingen van een enquête onder gezinnen (onderdeel van de DNB Household Survey 2003) naar diverse aspecten (verwachtingen, zorgen, houding en voorkeuren) rond de eigen pensioenvoorziening en het Nederlandse systeem van pensioenregelingen. We onderzoeken de samenhang tussen de uitkomsten en specifieke financiële en niet-financiële individuele karakteristieken. Een duidelijke meerderheid verwacht een versobering van de huidige pensioenregelingen en is tegen iedere maatregel die het niveau van de pensioenvoorzieningen aantast. Men betaalt liever meer AOW-premies. De uiteenlopende voorkeuren voor versoberingmaatregelen suggereren dat het delen van risico’s tussen generaties niet vanzelfsprekend is. Nederlandse huishoudens laten hun pensioenopbouw graag over aan hun pensioenfonds en zijn bereid hogere premies te betalen in ruil voor een gegarandeerde uitkering. Toch, is een substantiële minderheid voorstander van meer keuzevrijheid. Deze wens blijkt niet gerelateerd te zijn aan specifieke huishoudkenmerken en is geen weerspiegeling van specifieke voorkeuren van degenen die reeds derde peiler voorzieningen hebben getroffen. Velen maken zich vooralsnog niet druk over hun pensioen en nemen een “dat zien we dan wel weer” houding aan. Dit uit zich in een gebrekkige kennis van de eigen pensioenvoorziening, vooral bij jongeren, vrouwen, lageropgeleiden en mensen zonder baan.

Trefwoorden: AOW, tweede peiler pensioen, enquête onder huishoudens, risicohouding en -voorkeur

JEL codes: D12, J26, G23, H55

De Nederlandsche Bank

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1 INTRODUCTION

In the Netherlands second pillar pensions are an important supplement to the Pay-As-You-Go

(PAYG) public pensions. For nearly 90% they are dominated by defined benefit schemes.

Pension funds have accumulated large savings balances. In terms of GDP, accumulated Dutch

pension savings are much higher than elsewhere in the euro area. The funded nature of pensions,

together with compulsory participation, underpins intergenerational risk sharing. In essence, this

is achieved by older generations insuring their pension risks with younger generations. In

exchange for an ‘insurance’ premium represented by the funds’ financial buffers, the younger

generation makes up any shortfalls or inherits any surpluses. Although this solidarity makes the

funded system much more resilient to shocks than a PAYG system, Dutch pensions are being

threatened by two main risks.

The first risk relates to the recent adverse conditions in financial markets. During the boom in the

1990s, Dutch pension funds increased their equity holdings substantially to benefit from the high

returns in the stock market. Pension funds extrapolated these excess returns in their policy by

improving pension rights (like early retirement options) without raising premiums accordingly.

Hence, pension premiums have been set below cost price level. This, together with the large share

of equity holdings, has increased the susceptibility of the funds’ financial position to a downturn

in financial markets. This was revealed in the following bear market, which reduced pension

funds’ savings significantly; by the end of 2002 financial buffers were nearly exhausted (although

liabilities were still 100% covered). The historically very low level of interest rates has

aggravated this trend, by lifting the present value of liabilities and decreasing bond yields. To

strengthen their financial position, the supervisory authority (PVK) urged Dutch pension funds to

fill up any deficits and to restore buffers.

The second, more long-term threat to pension funds is represented by the ageing population 1.

Ageing implies that the contribution base that is available to absorb shocks becomes smaller, i.e.

the basis for intergenerational risk sharing crumbles. This looming threat is illustrated by the

pension liability / gross wage-ratio, which is projected to increase from 2.6 in 2001, to 4.5 in

2030 (Van Ewijk and Van de Ven (2002)). By consequence, premiums will become more volatile

in the occurrence of future shocks and thereby become a less effective instrument for pension

1 See Knaap, Bovenberg, Bettendorf and Broer (2003) for a recent comprehensive analysis of risks and policy options related to ageing in the Netherlands.

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funds. Besides the consequences for second pillar arrangements, ageing will also erode the

sustainability of first pillar pensions. Public PAYG pension expenditures are projected to double

to 9% GDP in 2040, if polic ies remain unchanged (Van Ewijk et al. (2000)).

These risks show that even the funded Dutch pension system needs structural reforms to

safeguard future pension provisions. Several institutional reforms are being discussed and/or

implemented. First, fiscal facilities for early retirement are being reduced, to raise the age of

retirement. This will both increase the contribution base and save the first and most expensive

years of retirement 2. Second, many pension funds are switching from final pay to average pay

systems, which makes risks on the liability side of pension funds’ balance sheets better

manageable. This relates to the fact that average pay systems are not susceptible to ‘career back

service costs’, since large wage increases do not affect previously built up pension rights. In an

average pay system the indexation instrument can be applied to both the stock of pension rights

and the flow of retirement payments (see e.g. Draper, Knaap and Westerhout (2003)).

Furthermore, some have argued that final-pay pensions provide poor labour market incentives by

overencouraging retirement relative to continued but lower-paid work (Diamond (2001)). Thirdly,

proposals have been made, mostly by academics, to introduce defined contribution elements

(Boot (2003)). In such proposals the distinction between second and third pillar schemes is

blurred, third pillar schemes being individual non-compulsory pension arrangements. Certain

companies (like Akzo Nobel) are actually considering to switch their pension scheme from

defined benefit to defined contribution, which is to some extent motivated by the planned

introduction of International Accounting Standards (IAS) 3. Lastly, some pension funds (like the

Dutch civil servants pension fund ABP) are recalibrating their set of instruments. This is done by

linking contributions and indexation mechanically to the level of pension reserves. This will lead

to a more transparent use of available instruments, since changes in pension rights and obligations

are made explicit to all stakeholders (Ponds (2003)).

Against this background Dutch households have been questioned on what they know about their

own pensions arrangements, on concerns they may have about their future pension income and

about measures to keep public pensions affordable, and on their attitudes and preferences

regarding second pillar pensions. These questions were part of the DNB Household Survey

2 See Mastrogiacomo, Alessie and Lindeboom (2002) for a microeconomic analysis of retirement behaviour of Dutch households and financial incentives. 3 Friedberg and Webb (2003) argue that the shift in pension structure from defined-benefit to defined-contribution played a role in reversing the decline in US retirement ages since the early 1980s.

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(DHS, formerly referred to as CentER Savings Survey), which was held in June 2003 among

approximately 1500 Dutch households 4. This paper reports on the general findings. Moreover,

we explore if and to what extent specific household or personal characteristics have a bearing on

the survey outcomes.

4 The DHS covers many aspects of financial behaviour of Dutch households, see Alessie, Hochguertel and Van Soest (2002) and De Nederlandsche Bank (2003). In this paper the focus is on pensions only. The analysis draws on the responses to the first questionnaire, which implies that the outcomes are derived from roughly 1,200 households and – depending on the questionnaire’s subject matter – a maximum of 2,000 persons.

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2 SOME REMARKS ON THE EMPIRICAL ANALYSIS

In the empirical analysis of the survey outcomes, the responses to the various questions are

related to a standard list of individual (household) features by means of a multinomial logit

model. This list of independent variables includes general characteristics such as age, gender,

educational background, and income, but also elements of financial behaviour such as home-

ownership and participation in the stock market. The independent variables in the logit analysis

are defined as follows:

- Gender: 1=male; 0=female .

- Age: measured in years.

- Education: 1=primary education; 2=prepatory intermediate vocational education (vmbo);

3=secondary pre-university education (havo/vwo); 4=intermediate vocational education

(mbo);

5= higher vocational education (hbo); 6=university education.

- Job: 1=payed job; 0=other

- Pension: 1=(early) retired receiving (2nd pillar) pension income; 0=other.

- Partner: 1=married or living together; 0=single.

- Income: 1=net monthly family income below EUR 1150; 2=income between EUR 1150 and

EUR 1800; 3=income between EUR 1800 and EUR 2600; 4=income larger than EUR 2600.

- Home: 1=owns house; 0=does not own house.

- Stocks: 1=invests in stocks or mutual funds; 0=does not invest in stocks.

In the next sections, the survey outcomes and the results of the logit analysis are reported in

tables. The first line in each table shows the percentage of respondents that choose to reply as

indicated, i.e. the probability of a particular reply according to the DHS. The subsequent panel in

each table presents the marginal effects of a unit change in the independent variables on the

probability of that particular response category, based on a multinomial logit analysis. For 0-1

dummies the marginal effects relate to a discrete change in the dummy variable from 0 to 1, for

the other independent variables the unit change takes the sample mean as a point of reference.

The main emphasis will be on those independent variables for which the marginal effects on the

probability of a specific response category are significantly different from zero at the 95%

confidence level.

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3 WHAT DO DUTCH HOUSEHOLDS KNOW ABOUT THEIR OWN PENSION

PROVISIONS?

Only a small minority of Dutch households (13%) is aware of measures related to eroded pension

savings. Such measures include raising pension contributions for employees and employers or

partial indexing. Although there may be good reasons for not noticing any measures taken by

pension funds, e.g. when they are of little financial consequence or only employers' contributions

have increased, this percentage suggests that people give relatively little thought to their pension

arrangements. This view is confirmed by the answers given to a number of questions checking the

general level of knowledge about pension arrangements (Table 1). 44% of Dutch households do

not know whether their pension schemes are based on final or average pay, or whether they

depend on the yields on the contributions deposited. 45% cannot tell if their pension rights are

indexed, while as many as 61% have no idea how much they have accrued, despite the pension

overviews they have received. Finally, 65% is unable to provide an estimate of the level of the net

pension income upon retirement.

The marginal effects reported in the second part of Table 1 provide further details on the

household characteristics affecting the degree of awareness. Clearly, age is an important

determinant of awareness: if age increases by 1 year, the probability of awareness rises with 1 to

2 percentage points, depending on the question at hand. Knowledge also increases with the level

of education, as might be expected. Male respondents are better informed about the type of

pension scheme and their eventual pension rights. Awareness for workers is much higher than for

those who do not participate in the labour market; awareness also increases with income. Home

owners are better informed about the type of pension scheme and about indexing; stock investors

mainly about the type of pension scheme and the eventual pension rights. By and large these

results do not come as a surprise. Furthermore, it was checked whether knowledge is higher for

those with additional private third pillar pension arrangements. This indeed turned out to be the

case. Yet, the general level of knowledge on such an important aspect of personal finance as

pension provisions is remarkably low.

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Table 1 Individual awareness of pension arrangements Outcome and marginal effects in percentage points ____________________________________________________________________________ Type of

pension scheme Indexing Current

pension rights Eventual pension rights

___________________ ____________ ____________ ____________ ____________ % of respondents aware of …..a)

56 55 39 35

Gender 15.8 (4.2) -0.0 (0.0) 5.6 (1.1) 16.7 (4.5) Age 1.1 (5.6) 1.6 (4.3) 2.0 (7.1) 0.8 (4.3) Education 3.3 (2.5) 6.7 (2.6) 2.4 (1.4) 3.1 (2.4) Job 11.5 (1.9) 15.9 (1.6) 11.9 (1.5) 16.7 (3.5) Pension -0.3 (0.0) 5.5 (0.4) 20.0 (1.2) 11.0 (1.0) Partner -0.6 (0.1) -3.7 (0.4) -4.7 (0.7) 3.0 (0.6) Income 3.0 (1.4) 7.9 (2.0) 5.7 (2.0) 6.4 (2.9) Home 10.5 (2.5) 19.9 (2.7) 8.8 (1.6) 1.1 (0.3) Stocks 13.6 (3.4) 2.8 (0.4) 5.0 (0.9) 9.8 (2.3) ____________________________________________________________________________ a) Percentage of respondents that have not ticked ‘don’t know / no reply’ in response to the following questions: 1) How are your pension rights built up (based on final pay / average pay / available contributions /

other system / don’t know)?; 2) Is your pension indexed (yes / no / don’t know)?; 3) What pension rights do you estimate you have accrued at your current/previous employer (.. euro

per year / don’t know)?; 4) How high do you estimate will your net pension be as a percentage of your last net income prior to

your retirement (.. % / don’t know)? Absolute t-values are presented in parentheses. See Section 2 for further clarifications.

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4 EXPECTATIONS AND OPINIONS ABOUT PENSION SCHEMES

The fact that employees are familiar with their own pension rights to a certain extent only, does

not preclude that the Dutch public is well aware of the more general developments and the debate

about the sustainability of the current pension arrangements. Roughly 15% of the panel members

states not to be able to get by on just the (expected) income after retirement. It turns out that by

and large 40% can just about manage to live on the pension benefit and that another 40%

succeeds in saving some money besides. Strikingly enough, those that claim still to be able to

save some money make up the majority in the 65-plus bracket, while most of those expecting just

to manage to live on their pension benefit are in the 65-minus category (Figure 1). The survey

Figure 1 Can you get by on your (expected) income after 65? Percentage of respondents

48

31

96 6

I can just get by on itYes, and I can still save some money tooNo, I am eating into my wealthNo, otherDon't know/no reply

< 65

33

51

94 3

> 65

provides no explanation for the difference, which could be due perhaps to the 65-minus setting

higher demands on lifestyle or factoring in a less favourable income pattern following measures

designed to ensure that the pensions remain affordable. Those who do not get by on their income

are eating into their savings or largely manage on their partner’s income. It remains unclear

whether this type of behaviour reflects restrictions in matching income and spending patterns or

whether it is motivated by consumption smoothing over the life cycle.

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Table 2 Expectations regarding public pension scheme 10 years ahead: pension age and benefit level Outcome and marginal effects in percentage points ___________________________________________________________________________________________ Pension age higher and/or

benefit level relatively lower Pension age similar or lower and/or benefit level relatively equal or higher

No opinion

___________________ ________________________ ______________________________ ____________ % of respondents expects that……..

66 18 16

Gender -7.1 (2.2) 8.3 (3.0) -1.2 (0.5) Age -0.1 (0.8) 0.5 (3.4) -0.3 (3.2) Education 2.7 (2.5) -0.7 (0.7) -2.1 (2.7) Job 5.5 (1.3) -3.7 (1.0) -1.8 (0.6) Pension 9.9 (1.8) -13.2 (4.1) 3.3 (0.7) Partner 6.6 (1.6) -10.7 (2.6) 4.0 (1.5) Income 0.0 (0.0) 1.8 (1.2) -1.9 (1.6) Home -5.4 (1.6) 6.3 (2.3) -1.0 (0.4) Stocks 1.6 (0.5) 1.1 (0.4) -2.7 (1.1) Absolute t-values are presented in parentheses. See Section 2 for further clarifications.

Regarding first pillar public pensions, two-thirds of Dutch households foresee that ten years from

now the pensionable age will be raised and/or the benefits will represent less purchasing power,

while only one in six respondents expect the situation to be similar to today’s (Table 2).

Compared to last year’s survey (De Nederlandsche Bank, 2002), concerns about the public

pension scheme have increased, since according to that survey half of the respondents expected a

higher pension age or lower benefits in the future. In spite of this, over 40% of the employed

people under the age of 65 expect to go on (early) retirement at the age of 62 at the latest, while

just under 40% reckons to do so at the age of 65 or later. Men and home owners tend to be

slightly more optimistic about the public pension scheme ten years from now. The same holds for

singles. Higher educated respondents, on the other hand, are more pessimistic.

Half of the respondents expect that in due course the difference in tax rates in favour of the 65-

plus (currently this group does not pay public pension contributions) will narrow, if not disappear

(Table 3). Here, it is not so clear what household characteristics drive the observed results. Home

and stock owners as well as older respondents are less inclined to opt for the “no opinion” reply.

However, their marginal contribution to either of the two remaining classes lacks statistical

significance. Perhaps somewhat surprisingly, there is some indication that among the higher

educated a relatively la rger group expects the current situation, i.e. no pension scheme

contributions for the 65-plus, to prevail. The reason might be that higher educated foresee that

pension arrangements will be cut back in other dimensions (see Table 2).

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Table 3 Expectations regarding public pension scheme 10 years ahead: public pension scheme taxes for senior citizens aged 65 and older Outcome and marginal effects in percentage points 65-plus pay public pension

scheme taxes No public pension scheme taxes for 65-plus (i.e. the present situation)

No opinion

___________________ ________________________ ________________________________ _________________ % of respondents expects that……..

50 19 31

Gender -1.6 (0.5) 4.1 (1.4) -2.5 (0.8) Age 0.2 (1.5) 0.2 (1.7) -0.5 (3.4) Education 0.0 (0.0) 1.9 (2.0) -1.9 (1.9) Job -0.0 (0.0) 2.4 (0.6) -2.4 (0.6) Pension 7.1 (1.1) 1.1 (0.2) -8.3 (1.6) Partner 1.2 (0.3) -5.8 (1.5) 4.7 (1.3) Income 0.6 (0.3) 1.9 (1.2) -2.5 (1.5) Home 5.7 (1.5) 4.6 (1.6) -10.4 (3.1) Stocks 5.1 (1.4) 5.1 (1.6) -10.2 (3.3) Absolute t-values are presented in parentheses. See Section 2 for further clarifications.

In the debate various reforms have been suggested to safeguard the affordability of first pillar

PAYG pension schemes and to alleviate the increasing burden they will put on Dutch public

finances. The DHS panel members were asked for their opinion regarding four much-suggested

measures: 1) raising the pension age; 2) raising public pension scheme contributions; 3) partial

indexation of pension benefits to wage growth; and 4) 65-plus also pay pension scheme

contributions. Notably, the three measures cutting down on the existing regulations (raising the

age of retirement; partial indexation of benefits to wage increases; and levying old-age pension

contributions from the 65-plus) are disliked particularly (Table 4). By and large two-thirds of the

respondents disagree flatly, while only one in ten agrees. A more moderate opposition is met by

the option to impose higher public pension scheme contributions on persons under the age of 65.

It should be noted here, however, that no amounts were specified in the questions regarding the

higher contribution and other related measures 5.

The marginal effects provide evidence that age is an important factor in determining the

responses. An increase in age is attended by a stronger inclination to agree to raising public

pension scheme contributions for the population under 65 and to oppose measures such as partial

indexation and introducing pension scheme contributions for the 65-plus. Younger people, on the

5 If the amounts involved by the measures concerned were specified, and the respondents were confronted with a compulsory choice, the outcome might turn out differently. For example, if it appears that public pension scheme contributions would need to rise more than is being envisaged, the replies may perhaps be coloured by self-interest.

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Table 4 Opinions about possible measures towards ensuring affordability of public pension scheme Outcome and marginal effects in percentage points Raising the pension age of 65? Raising the public pension scheme

contributions? ________________________________ ________________________________ Agree Neutral Disagree Agree Neutral Disagree ___________________ _________ _________ _________ _________ _________ _________ % of respondents 9 30 61 18 49 33 Gender -1.1 (0.6) 0.8 (0.3) 0.3 (0.1) 3.7 (1.4) 0.2 (0.1) -3.9 (1.2) Age -0.1 (1.4) 0.1 (0.5) 0.1 (0.3) 0.3 (2.5) -0.1 (0.7) -0.2 (1.4) Education 0.5 (0.8) 2.9 (2.7) -3.4 (3.0) 1.3 (1.5) 0.4 (0.3) -1.6 (1.5) Job -2.2 (0.8) -9.3 (2.1) 11.5 (2.5) 4.6 (1.2) -10.1 (2.2) 5.5 (1.3) Pension 11.2 (1.9) 5.8 (0.9) -17.0 (2.6) 13.6 (2.1) 4.0 (0.6) -17.6 (3.4) Partner -4.1 (1.5) -5.8 (1.4) 10.0 (2.2) -1.2 (0.4) -2.1 (0.5) 3.3 (0.8) Income 0.5 (0.5) 0.5 (0.3) -1.0 (0.5) 1.7 (1.2) 0.1 (0.0) -1.8 (1.0) Home -0.6 (0.3) 2.8 (0.8) -2.2 (0.6) -1.8 (0.6) 0.1 (0.0) 1.7 (0.5) Stocks 3.0 (1.3) -8.6 (2.6) 5.6 (1.5) -1.1 (0.4) 1.4 (0.4) -0.4 (0.1) Incomplete indexation of benefits to

wage growth? Public pension scheme contributions

also for 65-plus? ________________________________ ________________________________ Agree Neutral Disagree Agree Neutral Disagree ___________________ _________ _________ _________ _________ _________ _________ % of respondents 10 27 63 10 21 69 Gender 0.4 (0.2) 4.3 (1.4) -4.7 (1.3) 3.3 (1.5) -4.4 (1.6) 1.1 (0.3) Age -0.3 (3.2) -0.7 (4.9) 1.0 (6.3) -0.2 (1.6) -0.4 (3.4) 0.6 (3.9) Education -0.0 (0.0) -2.2 (2.1) 2.2 (1.9) 0.1 (0.1) 0.8 (0.8) -0.8 (0.7) Job -1.3 (0.4) 2.3 (0.5) -1.0 (0.2) 1.0 (0.3) -4.8 (1.3) 3.9 (0.9) Pension -0.6 (0.1) 8.5 (1.1) -7.8 (1.0) -3.3 (0.8) -2.8 (0.5) 6.1 (1.0) Partner -3.4 (1.1) -4.7 (1.1) 8.1 (1.7) 1.1 (0.4) 2.3 (0.7) -3.4 (0.8) Income 1.4 (1.2) 1.7 (1.0) -3.2 (1.6) 0.9 (0.7) -0.7 (0.4) -0.2 (0.1) Home 4.5 (2.2) -2.9 (0.8) -1.7 (0.4) 0.2 (0.0) 0.1 (0.0) -0.3 (0.0) Stocks 2.5 (1.0) 2.5 (0.7) -5.0 (1.3) 1.1 (0.4) 1.8 (0.5) -2.8 (0.8) Absolute t-values are presented in parentheses. See Section 2 for further clarifications.

other hand, are more inclined to support cutting down on pension rights, and would rather not see

the public pension contribution raised for the 65-minus. This suggests that younger generations

are better able to absorb a retrenchment of these rights. Their longer horizon provides them with

more flexibility to arrange supplementary third pillar income sources after retirement. Another,

more fundamental conclusion from the results, might be that intergenerational risk sharing is not

a matter of course for the different generations. This is also suggested by the finding that non-

pensioners are more opposed to raising both the pension age (this also applies to partners and

those holding a job) and pension scheme contributions. Somewhat surprisingly, being a pensioner

or non-pensioner has no statistically significant bearing on the public opinion regarding partial

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indexation or introducing pension scheme contributions for the 65-plus. On the whole, the role of

income, home-ownership and stock investorship seems to be limited and mostly insignificant.

Higher incomes and home owners tend to have fewer problems with partial indexation, which

might be related to their larger financial flexibility. Higher educated are relatively more opposed

to partial indexation but less opposed to raising the pension age. Overall, these conclusions do not

change by adding a 0-1 dummy variable controlling for the presence of third pillar private

pension arrangements (0=no; 1=yes) to the list of independent variables. The insignificance of

this additional factor (at the 95% confidence level) suggests that people with third pillar pension

provisions do not think differently on the issues raised in Table 4.

An interesting issue is whether households would adjust their saving behaviour if the existing

pension scheme were retrenched. 26% of the panel members said they would make additional

savings, 17% would not because their pension arrangements are sufficient, and 37% states that

they won’t save more because ‘we’ll deal with that when we come to that’ (Table 5). These

results seem to be in line with the findings reported by Alessie, Kapteyn and Klijn (1997), based

on the Socio-Economic Panel data of Statistics Netherlands, rejecting the one-for-one

displacement of free savings by pension savings which is predicted by the life-cycle hypothesis.

People with paid jobs and those investing in stocks are more inclined to save additionally. In the

data there is some further evidence, not presented here, that households with third pillar pensions

are partly driving this result. For singles, home owners, pensioners and older persons the share of

respondents, stating that they won’t save more because they can easily get on by their pension

benefits, increases. From this one might conclude that home-ownership is being considered as a

substitute for old age arrangements or acts as a buffer for absorbing pension scheme

retrenchments.

Table 5 Adjustment savings behaviour if pension schemes were retrenched? Outcome and marginal effects in percentage points ________________________________________________________________________________________ Yes, additional

voluntary savings No, I’ll see about that when I come to that

No, I can easily get on by my pension benefits

No opinion

___________________ ______________ ___________________ ___________________ __________ % of respondents 26 37 17 20 Gender -2.5 (0.7) -3.4 (0.9) 5.4 (1.8) 0.5 (0.2) Age 0.0 (0.3) 0.2 (1.1) 0.4 (2.6) -0.6 (5.4) Education 0.6 (0.5) -0.5 (0.4) 1.5 (1.5) -1.6 (1.9) Job 12.3 (3.0) -6.5 (1.3) 0.4 (0.1) -6.2 (1.7) Pension -5.6 (0.6) -11.7 (1.3) 14.4 (1.5) 2.9 (0.3) Partner 0.5 (0.1) 9.0 (1.9) -10.7 (2.3) 1.2 (0.4) Income -0.6 (0.3) 1.5 (0.7) 2.5 (1.4) -3.3 (2.5) Home -1.7 (0.5) -6.9 (1.7) 11.5 (3.8) -2.8 (1.1) Stocks 7.7 (1.9) -6.3 (1.5) 0.4 (0.1) -1.8 (0.6) ________________________________________________________________________________________ Absolute t-values are presented in parentheses. See Section 2 for further clarifications.

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5 INTEREST AND PREFERENCES REGARDING SECOND PILLAR PENSIONS

To what extent are people eager to be informed about their pension arrangement and the

management of their pension savings? Approximately 85% of the respondents rather would not

go too deeply into the details of their pens ion arrangements, half of this group taking again the

“we’ll deal with that when we come to that” position (Table 6). The desire to be informed

increases with age, though, while the ‘wait and see attitude’ is stronger for women than for men.

Home owners, people with paid jobs, pensioners and to some extent stock investors also adhere

more to staying well informed, although statistical significance is not always very strong.

Table 6 Interest for pension arrangements Outcome and marginal effects in percentage points Want to stay

well informed Want it properly arranged, but no interest in details

I'll see about that when I come to that

No opinion

___________________ ____________ _____________________ ________________ ____________ % of respondents that……..

7 42 44 7

Gender 3.6 (2.1) 12.2 (3.2) -15.8 (4.1) 0.1 (0.1) Age 0.4 (4.9) 0.1 (0.3) -0.4 (2.3) -0.0 (1.3) Education -0.3 (0.5) 2.0 (1.5) -1.8 (1.4) 0.1 (0.3) Job 6.1 (3.4) 7.1 (1.4) -10.3 (2.0) -2.9 (2.2) Pension 8.8 (1.2) 10.2 (1.0) -14.7 (1.6) -4.2 (5.3) Partner -3.5 (1.3) 2.1 (0.4) 0.2 (0.1) 1.1 (1.8) Income 0.4 (0.5) 3.0 (1.4) -2.7 (1.3) -0.7 (2.0) Home 4.0 (2.4) -1.0 (0.2) -3.3 (0.8) 0.3 (0.5) Stocks 3.5 (1.7) 5.1 (1.2) -7.1 (1.7) -1.4 (2.2) Absolute t-values are presented in parentheses. See Section 2 for further clarifications.

Taking the analysis one step further, the panel members were asked whether they would like to

exert more influence on pension arrangements (Table 7). More than half of the respondents report

that they would rather have their pension managed by the employers’ pension fund. This holds in

particular for people with paid jobs and those who already did retire 6. There is some evidence

that home owners more than non-owners prefer having their pensions managed by the employers’

pension fund. Still, three out of ten respondents would like to have more freedom of choice than

6 In the case of Tables 5, 6 and 7 the independent variable ‘pension’ relates to respondents younger than 65 who are (early) retried or living off one's private means.

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they are having now. One in ten would prefer to be free to choose a pension fund for managing

their pension contributions, while two in ten feel the need to exert influence on the way in which

their deposits are being managed, making the eventual benefits dependent on their own decisions.

This comes close to a defined contribution pension scheme, where the deposit is fixed without

there being any guarantee of the amount of the eventual benefit. The share of the latter group

increases moderately with age and is also bigger for those who are actively investing in stocks,

although here the evidence is fairly weak. There is no significant relationship with educational

background or income. An interesting issue is whether or not the preference to exert more

influence is higher for those who do have knowledge about their own pension arrangements. This

turned out not to be the case. Quite surprisingly, the same holds for households with third pillar

pensions. Apparently, they have no stronger desire to exert more influence on (second pillar)

pension arrangements than others.

Table 7 Influence on pension arrangements Outcome and marginal effects in percentage points ___________________________________________________________________________________________ Want a say in how

pension deposits are invested

Want to choose their own pension fund

Want their pension build-up managed by employer

No opinion

___________________ ____________________ _______________ ____________________ ________ % of respondents that……..

21 8 53 18

Gender -3.7 (1.0) 0.6 (0.2) 5.5 (1.4) -2.4 (1.9) Age 0.4 (2.0) -0.0 (0.2) -0.2 (1.0) -0.1 (2.2) Education 0.4 (0.3) 1.0 (1.2) -0.0 (0.0) -1.4 (3.6) Job -4.2 (0.8) -7.0 (1.6) 11.7 (2.0) -0.5 (0.3) Pension -7.5 (1.1) -7.0 (2.6) 25.4 (3.5) -11.0 (8.2) Partner 2.4 (0.5) -2.7 (0.8) -3.0 (0.6) 3.4 (3.2) Income -0.8 (0.4) 2.0 (1.4) 0.5 (0.2) -1.7 (2.7) Home -1.7 (0.4) -2.8 (1.0) 7.1 (1.6) -2.6 (1.9) Stocks 5.7 (1.4) -2.4 (0.9) -1.9 (0.4) -1.4 (1.1) ___________________________________________________________________________________________ Absolute t-values are presented in parentheses. See Section 2 for further clarifications.

As mentioned in the introduction, the vast majority of pension contracts in the Netherlands are

defined-benefit-based, with the pension funds making conditional or unconditional pledges as to

the amount of the pension benefit. The majority of the population seems to feel comfortable with

the defined benefit system. 56% of the respondents report that they would rather pay a higher

contribution for a guaranteed pension (Table 8). This share is higher for higher educated, for

respondents with paid jobs, for retired people under 65 and for higher income classes. Only 15%

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Table 8 Certainty about pension benefits Outcome and marginal effects in percentage points I'd rather pay more money for

a guaranteed benefit I'd rather pay less mo ney for a benefit without guarantees

No opinion

___________________ ________________________ ________________________ ____________ % of respondents stating that……..

56 15 29

Gender 1.6 (0.4) 4.6 (1.6) -6.2 (2.0) Age 0.2 (1.0) -0.2 (1.4) 0.0 (0.0) Education 3.4 (2.7) -1.0 (1.1) -2.4 (2.3) Job 17.2 (3.5) -6.2 (1.5) -11.0 (2.6) Pension 17.5 (2.4) -5.8 (1.0) -11.7 (2.5) Partner -5.0 (1.1) -3.5 (0.9) 8.5 (2.6) Income 5.6 (2.7) -0.1 (0.1) -5.5 (3.4) Home 4.7 (1.2) 1.0 (0.3) -5.7 (1.7) Stocks -1.0 (0.2) 4.6 (1.4) -3.7 (1.1)

Absolute t-values are presented in parentheses. See Section 2 for further clarifications.

prefer a lower contribution in exchange for greater uncertainty about the eventual benefit. An

important caveat with these outcomes is that households were not asked how much extra

contribution they would like to pay for a guaranteed benefit.

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6 THIRD PILLAR PENSIONS

Third pillar pensions are individual non-compulsory pension arrangements. Some 35% of the

people in work have made third pillar pension arrangements besides the regular second-pillar

pension scheme they participate in through their employer (Table 9). In most cases, these

arrangements are by way of annuity and single premium insurance policies. These may serve, on

the one hand, to bridge the gap between the date of early retirement and the date on which the

pension become payable, on the other hand, to supplement the pension rights. Obviously, for a

great many workers the pension build-up falls short of 40 years. The marginal effects reported in

Table 9 suggest that third pillar pensions are more common for men, respondents with paid jobs

and for stock investors. For the group of already retired people third pillar pensions are less

common. There is no clear link with income and home ownership. Extending the list of

explanatory variables to include awareness indicators reveals that people with knowledge about

their own pension arrangements are more likely to have third pillar pensions than those who lack

knowledge.

Table 9 Third pillar arrangements Outcome and marginal effects in percentage points _____________________________________________________ Yes No No opinion ___________________ _________ _________ _________ % of respondents 35 62 3 Gender 12.9 (3.6) -13.0 (3.6) 0.0 (0.2) Age 0.1 (0.6) -0.1 (0.6) -0.0 (2.9) Education -1.0 (0.8) 1.0 (0.8) -0.0 (0.7) Job 14.6 (2.7) -14.6 (2.7) -0.0 (0.0) Pension -11.0 (1.6) 13.2 (1.9) -2.2 (3.1) Partner 6.3 (1.3) -6.4 (1.4) 0.1 (2.3) Income 1.7 (0.8) -1.7 (0.8) -0.1 (2.1) Home 4.6 (1.1) -4.6 (1.1) -0.0 (0.1) Stocks 8.7 (2.1) -8.7 (2.1) -0.0 (0.2) _____________________________________________________ Absolute t-values are presented in parentheses. See Section 2 for further clarifications.

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7 CONCLUSIONS

Dutch households are well aware of the debate on the sustainability of the present pension

system. A clear majority expects public pension schemes to be retrenched within ten years from

now. Nonetheless, a similar majority of the public rejects reforms, such as raising the retirement

age, partial indexation, or public pension contributions for the 65-plus, that infringe on what they

regard as acquired rights. One would rather like to pay higher contributions until the age of 65 in

order to receive today’s level of benefits from then onwards. It remains, however, to be seen if

this preference will hold once it is clear how much higher pension contributions have to be in

such a situation. The divergence in preferences towards retrenchment measures across

generations indicates that intergenerational risk sharing is not something natural. The public

prefers to have their pension build-up managed by pension funds and would accept having to pay

higher contributions in exchange for guaranteed benefits. And yet, a substantial minority (some

30% of respondents) advocates a greater freedom of choice, by way of deciding oneself on how

pension savings should be invested (21%) or selecting a pension fund of one’s own choice. Quite

surprisingly, this preference for more freedom in pension arrangements is not significantly linked

to particular household characteristics such as education, knowledge about pension arrangements

or income, nor does it reflect the particular interest of those who already have third pillar pension

provisions. Many, however, are as yet not concerned about their pension rights, adopting a “we’ll

see about that when we come to that” attitude. This manifests itself in a substantial lack of

knowledge about one’s own personal pension arrangements. The poor knowledge may not only

be caused by a lack of interest, but also by imperfections in the disclosure of information on

pension contracts and acquired pension rights. Here, a role may be reserved for pension funds and

national authorities. Having a realistic image of the level of pension benefits on retiring is of

general interest. Our results suggest that notably young generations, women, low-skilled workers

and people out of work could benefit most from further information dissemination and

transparency.

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