Aegon takes market lead in post-pension-age investments

December 1, 2016

The Netherlands is doing justice to its reputation as having one of the world’s best pension systems. New legislation now allows for flexibility in how to invest in assets in a defined contribution pension plan past the pension age.

Aegon is poised to become one of the first pension providers / asset managers in the country to enter this new branch of investment management.

Effective September 1, individuals in the Netherlands may invest part, or all, of their accumulated pension savings from a defined contribution (DC) plan after they reach the pension age. Previously, they were required by Dutch law to purchase a fixed annuity from an insurance company from their entire accumulated DC pension savings, which then provided them with a guaranteed lifelong pension benefit.

Outsmarting bad luck

In the current low and negative interest rate environment, soon-to-be retirees would get a bad deal under the present regime because the underlying annuities would be extremely expensive. The reason is that insurers would have to buy many more bonds in order to guarantee the same level of lifetime income, thereby sharply increasing the costs for participants and lowering the amount of their monthly pension benefit.

Under the new investment regime called 'doorbeleggen' in Dutch, a person's pension benefit will no longer depend on sheer (bad) luck – namely the level of the interest rate at the moment they retire.

"Aegon will be one of the frontrunners in this innovative investment construction by launching a new product so soon after the new legislation that will benefit participants," said Ruud Smits from Aegon Asset Management Investment Solutions.

Aegon offers its first post-pension-age investment solution starting November 30 to participants in DC plans from Aegon Netherlands who will retire in the next few years. This group encompasses hundreds of thousands individuals. The offering is open to people that have accumulated their capital outside Aegon as well.

Innovation on the way

Post-pension-age investment will spur much innovation in the investment management industry as it completely redefines what it means to have an 'optimal' mix of assets in a DC scheme.

Traditional asset allocation for a DC plan claimed that a 25-year old should have a higher portion of risk-bearing assets in his retirement portfolio than if he were 55 because younger participants have more time to grow their portfolio and weather market volatility. As the employee gets older, the asset manager gradually reduces the proportion of risk-bearing assets in favor of safe assets like bonds. And once a person enters retirement, the asset mix doesn't change at all any more — it only contains annuities with guaranteed cash flows in order to be able to pay a guaranteed lifetime pension.

Professionals refer to this changing asset mix over a person's lifecycle as a 'glide path'.

Traditional glide path

Exhibit 1, Traditional indicative glide path. Source: Aegon Asset Management

A new glide path

The new investment regime offers far more flexibility in the asset mix and glide path. The asset manager can invest part of a person's pension savings in risk-bearing assets past the pension age. Asset managers will also offer solutions that pace investments – i.e., invest different amounts at different periods during one's retirement in order to take advantage of rising interest rates and risk premiums.

Innovation is also likely to emerge for the asset mix during one's working life. Smits explains: "Up to now, pension funds had models for glide paths up to the point of the pension age. After that you went into annuities. But if you already know that you want to invest in past your pension age, you might want a different glide path during the accumulation phase.

Doorbeleggen glide path

Exhibit 2, Indicative glide path "doorbeleggen". Source: Aegon Asset Management

Aegon Nederland and Aegon Asset Management have combined their knowledge and expertise in fixed-income securities and liability-driven asset allocation with general pension and actuarial knowledge to take the lead in this new market segment. "Ever since the shifting accent from DB to DC, Aegon Nederland wanted to give clients the opportunity to choose between maintaining the certainty of fixed income or optimising the expected pension benefits", says Lex Solleveld from Aegon Investment Office. The Investment Solutions team has developed a model that determines the most efficient mix of assets during and past retirement. "We can create a construction whereby you never outlive your savings. But the consequence could be that you might earn a higher monthly pension benefit in some years, and a lower one in others," explains Smits.

The Investment Solutions team has developed a model that determines the most efficient mix of assets during and part retirement. We can create a construction whereby you never outlive your savings.

For that reason, Smits stresses that clear communication is vital so that participants understand the pros and cons and make the right decision. In many cases, participants will need a professional financial advisor at their side.

The upside of post-pension-age investment is higher expected pension benefits, but the downside is that these benefits will fluctuate from year to year. In negative economic circumstances they might decrease substantially. So the ability to cope with the fluctuations is essential, which depends on many factors such as other post retirement income and expenses. "Ultimately, it boils down to this: Can I sleep easily or will I lie awake at night worrying?" he says.

As post-pension-age investment solutions are completely new for DC schemes in the Netherlands, Aegon wants to keep things simple for now. For example, the glide path of the product it launches initially will be based on an average of participants. "In the long run, however, as this phenomenon becomes more well-known, products should become more individualized."

International perspective

Legislation has an important influence on pensions that can and will be offered in any country. The change in legislation in the Netherlands makes it possible for Aegon to offer this new product to participants. In the UK, the taxation of death benefits has been modified rather drastically in combination with changes in legislation regarding the near requirement of buying a lifelong annuity. "In the USA variable annuities have been available since the 1960's" says Lex Solleveld. Important difference with the UK are the absence of restrictions on withdrawals for these products in the USA and a culture where investors want to make personal decisions regarding their investments. The situation is quite different in the Netherlands. Instead the Dutch participant is used to certainty regarding his income after retirement. The advantage of the new product Aegon launches on December 1, 2016 over the common structures available in the USA is that, although the level of the benefits will vary per year with the returns of the investments, the construction will make sure that there is a benefit to be paid regardless of the age an individual participant will reach.

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