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The Netherlands is overhauling its €1.8tn pension system in a sweeping shift from guaranteed payments to individual investment accounts, a change that could increase payments to up to 11mn savers according to its backers.

Funds with assets worth almost a third of the country PENSIONS The system will move in January from a fixed benefit to a defined contribution system, where income will fluctuate depending on the performance of the fund.

The transition follows more than 10 years of planning and is designed to make the Netherlands‘ pension system that will be sustainable for decades to come as its population ages.

“This is an extraordinary and profound transition,” said John Landman, chief executive of the country’s second largest scheme, the Pension Fund for the Health and Welfare sector (PFZW), which switched to the new system on January 1.

“We want the new pension plan to remain collective and include some level of unity, next to a more effective adjustment to the volatility of the financial markets,” he added.

The transition comes as employers around the world are closing defined benefit pension plans – where they bear the risk of making shortfalls – in favor of defined contribution schemes, where individuals bear the brunt of the risk.

The new system includes a form of collectivity for most schemes, so that an individual’s pension assets do not automatically pass to beneficiaries when they die. The Dutch said that this step allows for the risk to be shared and allows the total set of assets to grow and higher pensions.

“Collective investment helps to create a high pension income for young workers and a stable and predictable pension income for the older generation and to create confidence in the pension system,” said Annette Mosman, chief executive of APG, which manages assets for ABP, the largest pension fund in the Netherlands.

The transition comes at a time when most Dutch schemes have large surpluses, meaning they have more assets than the amount they need to pay into pensions. This allows them to increase the current pension payment under the new system, assigning all assets to the members of the scheme.

PFZW, for example, plans a potential increase in payments of up to 7 percent after the change, although the final figure will depend on the financial position at the time.

Some funds may expect pensions to increase further. According to the consultancy Aon, the total funding level of the system was 128 percent in October – meaning that assets are higher than the amount needed to meet pension obligations.

Not all surpluses are passed on to higher pensions, however, because they keep a buffer to smooth pension payments if markets fall sharply.

The transition is also expected to have a major impact on how Dutch pension funds invest, encouraging them to invest more in risky assets with higher expected returns, and less in debt, which is held to generate income in line with pension liabilities.

APG estimates that the transition could lead to a €1.8tn system boosting private equity investment and credit investments by around 5 percentage points – or €90bn – over the next five years.

On the other hand, strategists at Dutch bank Rabobank expect €64bn of long-term sovereign debt to be sold in the course of the transition, which is expected to be completed by 2028.

The Dutch pension system is the envy of Europe and was rated top in Mercer’s global pensions index this year, which is assessed on various measures including adequacy, sustainability and integrity.

By 2024, a quarter of the country’s elderly population will have a gross annual retirement income of more than €65,000. Only 4 percent of pensioners are poor – mainly immigrants who have accumulated fewer years of contributions, and the self-employed.

However, some pension experts are concerned that the transition to the new system is too complicated and could cause errors in the account values ​​shown in their members’ funds. The quality of the data going back decades is poor – especially in sectors with many small businesses that are slow to move to computerized payroll systems, such as hospitality.

“The chances of one or two or three of the funds experiencing a serious error in the benefit calculation are very high,” said Roland van den Brink, former president of the Dutch actuarial society who has held senior positions at several large Dutch pension funds.

He added that the average employee and employer contribution to Dutch pension funds is around 25 per cent – much higher than the same DC contribution rate in the UK or Australia.

The reductions in contribution rates are “expected”, van den Brink said, given the trend in industries to move to the global average, leaving future pensioners “very vulnerable to inflation”.