Marco Robben
By Marco Robben
5 years ago | comments

Defined Ambition the new mirage in pension schemes?

Blog post | Pension Defined Ambition the new mirage in pension schemes?

How (un)certain is your pension(plan)?

If I tell you that the following formula indicates how much pension a worker gets when he has paid “p” euros in premiums during “t” years, than you might think “it looks complicated, it will be correct.”

In reality, this formula explains the phenomenon mirage. The main feature of a mirage is that things become visible which in reality are much further away. And that is exactly the feeling I get when I read about the latest solution to pension problems: Defined Ambition.

What is a Defined Ambition pension?

A Defined Ambition pension means that the employee gets an indication (ambition) of the level of his retirement payment. His actual pension may be higher but also lower, depending on, inter alia, the investment results. The difference with the hitherto usual Defined Benefit pensions (final salary or average salary) is that we

  • tell the employee that the amount of his pension is uncertain (which in most cases it always has been but we have not told him so clearly)
  • we take extra risks in investments to ensure that there is a chance of a higher pension or indexation after retirement

Taking extra risk in itself is not such a crazy idea unless you have no reserve to absorb some setbacks, such as in case of a funding ratio of around 100%. It would be best to first reduce the pension entitlements to form a reserve and then invest with a higher risk. That would allow to increase pension entitlements in the future, but how do you explain that to the employee?

5 tips for a good pension scheme

I do not have a preference for a particular pension scheme or provider but I would like to give you 5 requirements that a good pension scheme or pension provider should meet.

1) Make sure the system is understandable to employers and employees

The main recommendation for any consumer is “do not buy a product that you do not understand.” I would add to this: “do not sell (as an employer) a product to someone else (employee) that the other person does not understand.”

2) Costs for the employer, returns to the employee

A worker who sees a proper use of his (pension) premium (that is growth of his capital or entitlement) is more positive about his retirement plan than someone who only has to face Aa(disappointing) final result. As an employer you should however watch for a predictable and adjustable level of cost of your pension plan.

3) Give the employee influence on his pension

Employees are not the same and have different needs, now and at the start of their retirement. Make clear what to expect and give them opportunities to make adjustments (such as additional savings, different risk profile, earlier or later retirement, etc.).

4) Protect workers against too much risk

There are bookcases full written about the negative effects of too much risk taking by employess and the reasons for that behavior. Avoid dramas by providing a bottom line in the choices that employees themselves can make. Take your responsibility as an employer, and at least, for example, arrange for a survivors pension on a risk basis.

5) Help your employees when making retirement choices

Communicating with the employee about his pension will not change his inability to understand his pension scheme. Only actively support and personal advise to your employees ensures that they understand their pension scheme and most importantly, make choices that suit their requirements. This is true for the pension accumulation period but also at the moment of retirement.

Mirage or adequate pension arrangement

Finally, to go back to the mirage. According to Wikipedia, a mirage dark water ride in the Efteling was one of the first modern dark rides in the Benelux. Let’s make sure that the pension of your employees becomes no dark water ride but an adequate retirement payment after a lifetime of hard work.

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Want to know more? Get in touch with Marco Robben:

  • Email marco.robben [at] mastermind [dot] eu
  • Phone 06 5202 7366

Pension providers in the Netherlands

Pension providers in the Netherlands What contribution can another pension provider make to a better retirement plan? A better scheme for you as an employer and a better pension for your employees. With the introduction of new embodiments as the PPI and the API you as an employer have more options and more room for negotiation. Often with the end result being lower cost and greater flexibility in your plan. In the eBook "Pension providers in The Netherlands" you’ll find the pros and cons of domestic and cross border pension providers in The Netherlands.

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