Article appeared in the Telegraaf Pension Special on 20 September 2012
The PPI has now been accepted as a new player in the pensions market, though some are still warily testing the water. Their reluctance to take the plunge stems from ignorance about the opportunities offered by the PPI and defined contribution schemes. This has given rise to many myths about PPIs. What are these myths and what is the true story?
The PPI is a magic cure-all
The PPI administers group defined contribution schemes. The PPI itself is nothing other than a new type of pension administrator. Its launch does not involve the introduction of a new pension system or new types of pension schemes. Above all, the PPI is an excellent means to create transparency about charges and investments – and thus provide pensions tailored to modern needs.
Individual pension accrual is not effective
Pension contributions are invested. The investments are pooled in four asset classes (equities, bonds, cash and property), so that the number of transactions is limited. This preserves the economies of scale that can be achieved with group pensions. The pension entitlements are translated to the individual, resulting in efficient low-cost administration.
Insurance must be arranged separately with a PPI
With a mandate, a PPI can be authorised to offer, accept, manage and communicate about insurance. The result is an integrated service with a single point of contact and a single pension administration agreement. In this way, insurance forms an integral part of the pension scheme.
All risks rest with the employee
In case of occupational disability or death, the employee or his next of kin receives a guaranteed benefit payout. These risks are borne together in a group scheme, as they cannot be insured individually. This aspect is therefore based on solidarity. The retirement pension is accrued on an individual basis. By investing carefully, the investment and interest rate risks are largely controlled. And thanks to the long investment horizon, the employee can comfortably bear the remaining risks, provided of course he knows the level of risk and how he can influence that risk.
Employees want guarantees
A survey of Motivaction (2010) showed that 73% of Dutch people want certainty about the level of their pension. However, as soon as the impact of the certainty on the level of the pension was explained, 46% changed their choice and were prepared to take more risk with their pension plan investments. So a better understanding of the effects of guarantees leads people to make different choices.