Netherlands set to reform $1.6 trillion private pension sector

By Bart Meijer

AMSTERDAM (Reuters) - The Netherlands is set for a major overhaul of its 1.45 trillion euro ($1.6 trillion) private pension industry, Europe's largest, that will see funds ditch the promise of guaranteed benefits as they try to keep a lid on costs.

Following years of debate, the Dutch Senate on Tuesday gave its final approval for the shift to a "defined contribution" system, which proponents say will yield better results - though opponents have warned of the extra risks it introduces.

Traditionally, Dutch workers and employers pay into private pension funds that promise a final pension at a specific level - an increasingly rare example of a "defined benefit" system.

Together with a state pension system, this has enabled Dutch workers to retain most of their income when they retire.

The Dutch system has been seen as a model, but in recent years it has struggled. Interest rates and premiums were too low to allow funds to compensate for inflation, and the threat loomed large of cuts to benefits.

Deteriorating coverage ratios also led to debates over who held which claims to the collective pot, as pensioners pushed for inflation indexing while workers warned that would hurt their future benefits.

Under the new rules, the around 180 Dutch pension funds will specify to individual workers and pensioners which part of the collective pot is actually theirs - and what benefits they can realistically expect.

The new system will also make it easier for funds to increase payouts when investments do well and to lower them when markets fall.

Solidarity mechanisms will, however, be built in to smooth the effect of bad years on investments and to make sure people keep receiving their pensions for as long as they live.

Funds will have to apply the new rules by 2028.

($1 = 0.9084 euros)

(Reporting by Bart Meijer and Yoruk Bahceli; Editing by David Holmes)