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1 Annual Report 2006

2 List of abbreviations ABP AMANDA CBS CEPR CPB COMPARE DB DC DNB DP EUR FEB ICPM FTK MaGW MIT MPhil MSc MTI NEA NIDI NVAO NWO OCenW Algemeen Burgerlijk Pensioenfonds (Dutch civil service pension fund) Advanced Multidisciplinary Analysis of New Data on Aging Centraal Bureau voor de Statistiek (Statistics Netherlands) Centre for Economic Policy Research Centraal Plan Bureau (CPB Netherlands Bureau for Economic Policy Analysis) Project on improving international comparability of indexes for health, well-being, etc. Defined Benefit Defined Contribution De Nederlandsche Bank (the Central Dutch Bank) Discussion Paper Erasmus Universiteit Rotterdam (Erasmus University Rotterdam) Faculty of Economics and Business Administration International Centre for Pension Management (at the Rotman School of Management, University of Toronto) Financieel Toestingskader (Dutch solvency rules) Maatschappij- en Gedragswetenschappen, NWO (Social Sciences, Dutch Research Council) Massachusetts Institute of Technology Master of Philosopy Master of Science Maatschappelijk Topinstituut (Societal Top Institute) Netspar Economic Advisors Nederlands Interdisciplinair Demografisch Instituut (Netherlands Interdisciplinary Demographic Institute) Nederlands-Vlaamse Accreditatieorganisatie (Dutch Accreditation Authority) Nederlandse Organisatie voor Wetenschappelijk Onderzoek (Netherlands Organisation for Scientific Research) Ministerie van Onderwijs, Cultuur en Wetenschap (Ministry of Education, Culture and Science) OPF PhD PvdA PGGM OECD RuG SER SHARE SVB SZW TT UCL UM UMBS USE UU UvA UVB UvT VB VSNU VU VvV Stichting voor ondernemingspensioenfondsen (Foundation of Company Pension Funds) Doctor of Philosophy Partij van de Arbeid (Dutch Labor Party) Pensioenfonds voor de Gezondheid, Geestelijke en Maatschappelijke belangen (Dutch pensionfund) Organisation for Economic Co-operation and Development Rijksuniversiteit Groningen (University of Groningen) Sociaal Economische Raad (Social Economic Council) Survey of Health, Aging and Retirement in Europe Sociale Verzekeringsbank (Social Insurance Bank) Ministerie van Sociale Zaken en Werkgelegenheid (Ministry of Social Affairs and Employment) Tenure Tracker University College London Universiteit Maastricht (Maastricht University) Universiteit Maastricht Business School (University of Maastricht Business School) Utrecht School of Economics Universiteit Utrecht (Utrecht University) Universiteit van Amsterdam (University of Amsterdam) Unie van Beroepspensioenfondsen (Association of Occupational Pension Funds) Universiteit van Tilburg (Tilburg University) Verbond van Verzekeraars (Association of Industry-wide Pension Funds) Vereniging van Universiteiten (Union of Universities) Vrije Universiteit (Free University) Verbond van Verzekeraars (Dutch Association of Insurers)

3 The life cycle expressed in interiors Commissioned by Netspar, Petra Stavast took a series of interior photographs depicting different life styles and sequential stages in life. On one level, the profusion of elements in the picture provides information, at another, it stimulates curiosity about the people living there. Sam Kuijer page 7 Jantje Roelfs page 8 Gabriëlla Maas page 13 M.A. Du Ry van Beest Holle page 14 Arya Malessa page 21 Jessica Joyce page 22 Mevr. Roelfs-de Vries page 27 Murat Karacoban page 28 Drs. Jongejan page 33 Mevr. De Ligt page 34 Dhr. Dinther page 41 Mevr. van Dijk page 42

4 Annual Report 2006 Network for Studies on Pensions, Aging and Retirement

5 2 netspar annual report 2006 Partners of Netspar Contents Pension funds and assett liability companies Universities Public sector Preface 5 State of affairs 9 Research on the macro, meso and micro levels 15 Thematic approaches: scope for entrepreneurship 23 The importance of data 29 Graduate and post-academic education 35 Sharing knowledge 43 Supplements 45 Insurance companies and banks Other organizations

6 netspar annual report 2006 preface Preface Scientific Directors Netspar Lans Bovenberg Theo Nijman Lex Meijdam Arthur van Soest During the early days of Netspar s existence, the organization managed to develop into a leading intellectual network. The growing political interest in the social and economical consequences of the ageing population offered Netspar the possibility of increasing its influence, especially in Europe. The pension sector which encompasses pension funds, banks, insurers, financial and management service organizations, supervisors and the government has a continuing need for renewal, research and education. In the past year, Netspar has tried to address this need, as is described in this report. Netspar launched an ambitious program in 2006 that will be intensified in 2007, with many more educational opportunities, such as the Netspar-UMBS Academy. Netspar is an open organization that is committed to steering a course that is recognized and supported by a broad group of sponsors. That explains why, in April 2007, an evaluation was conducted that will be completed in The list of current issues that Netspar is involved with is considerable, both in number and significance. Risk management and solvency and the optimum pension agreement were addressed, and macro themes such as the impact of aging on public budgets and the future of the welfare state in the light of the demographical development were also explored. A lot of attention was paid to the restrictions of human choice and the interest in adequate defaults. These defaults should protect participants of a pension fund against the unwanted consequences of not making any choices at all. Pension Fund Governance is more than simply the good governance of a fund. It is also a well thought-out duty to provide responsibility for participants of a pension arrangement who, especially at a young age, do not fully realize the wider significance of having a good income when their career is over. The free market process in the pension sector was discussed regularly during the last year. This discussion will be continued in greater depth in In this context, the theme Nederland Pensioenland was also put on the agenda. The Netherlands has an excellent and extensive pension sector that could play a meaningful role internationally, but the sector isn t yet sufficiently aware of the opportunities. At the European level especially, more things have become possible because of the new pension guidelines. Nevertheless, there are too few initiatives regarding the export of Dutch experience and knowledge. The drive to introduce the new Pension Act on 1 January 2007, which took a great deal of time and energy, may be the cause of this lag. It is my hope that the possibilities of stimulating an international knowledge exchange and exporting these ideas will be taken advantage of in At Netspar, this topic remains high on the agenda. It is surely no coincidence that Pensions and Social Insurances was designated by the Innovation Platform as a key area for innovation. Mission Netspar aims to build a strong network of academic researchers, financial institutions and government agencies in the Netherlands for the purpose of addressing the social and economic challenges of an aging population. Netspar draws on the expertise of both Dutch and international researchers to examine issues pertaining to pensions and retirement. The fundamental goal is to maintain and strengthen those institutional structures that support lifecycle planning, build and protect human resources, and engender intergenerational support and cooperation. Joep Schouten (Cordares) Chairman Advisory Board Netspar

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8 state of affairs State of affairs Netspar is running on course. The national Innovation Platform has designated pensions and insurance as one of the six key innovation areas of the Dutch economy. This has given our work a considerable boost. Among other things, it has facilitated the strengthening of a public-private network of universities, ministries and other public institutions, pension funds and insurers. a solid network established Netspar serves as an important entrepreneurial role model on how academic institutions working on the social sciences can cooperate with the public and private sectors. Netspar has created focus and mass by initiating a large network of participants from almost all major knowledge institutions that are active in this field and almost all relevant non-academic partners. Netspar cooperates with Dutch universities that work on pension and aging issues. In fact, many of the major research groups at Dutch universities that are active in this field are funded by Netspar and participate in its activities. Netspar thus encourages closer cooperation between Dutch researchers of various universities and research institutes. Indeed, Netspar experiments with new approaches to bridge the gap between practice and academia. Through its requirements for funding, Netspar has stimulated the adoption of the tenure-track system (as favored by the Innovation Platform) in the social sciences. public debate Netspar functions as a national platform for informed debate on aging and pension issues. Topics such as the life-course arrangements, the sustainability of the government budget and the future of the welfare state have played a major role in the policy debate and in the election campaigns. Several leading politicians and policymakers have presented their ideas at Netspar meetings meetings that have received wide attention in the press. For example, Wouter Bos, the leader of the labor party at the time still in opposition used Netspar as a platform to reveal his vision on the future of the welfare state and its role in securing old-age pensions in an aging society. In addition, some of our researchers commented on the projections that were made by CPB Netherlands Bureau for Economic Policy Analysis on the budgetary consequences of aging. social innovation Last year, Netspar pursued social innovation by studying innovations that allow pension funds and insurance compa- nies to better meet the needs of their members and clients. We organized meetings on optimal measurement of the indexation quality of pensions, and we explored ways in which vulnerable groups within pension schemes can best be protected against risks. The potential for successful innovation in pensions and social insurance in the Netherlands has been underscored by the decision of the Innovation Platform in the second half of 2006 to appoint Pensions and Social Insurance as one of the key areas for innovation in the Netherlands. Netspar stands ready to continue to contribute significantly to the successful development of this innovation area. The development of new insurance products that integrate pensions, housing and care was also considered. In this way, Netspar hopes to have raised awareness of the importance of these issues. Indeed, elderly people are becoming wealthier and more assertive. This creates ample scope for financial innovation. Towards that end, Netspar hopes to help pension funds and insurance companies in developing new products that suit the needs of the elderly of the future. themes Academic entrepreneurship at various universities has been successfully stimulated through theme grants. Every year, Netspar allocates 1 million to three theme-based projects; the annual awards are given for a three-year period. The theme groups include researchers from various universities and institutes. Themes involve all three pillars of Netspar: research, education and knowledge exchange. The first three themes started in April 2006, and three new ones start in research In the course of its first two years Netspar has established a solid network on a national level. Researchers from Dutch universities that work on the same topics as Netspar participate in the network, enabling Dutch universities to hire promising new junior researchers. Netspar s academic importance is therefore growing, and in the near future its potential will develop further, mostly on an international level. Last but not least, Netspar has become an entrepreneurial example of how public and private parties in the service sector can work together with academics to stimulate social innovation.

9 10 netspar annual report 2006 state of affairs 11 Capital flows will drastically change in the coming decades due to aging populations in developed countries nout wellink president of de nederlandsche bank (dnb) We are currently in the middle of an unprecedented demographic transition caused by lower birth rates and increased longevity. The ageing of our population will have severe consequences for the economy of our country. It will affect not only public finances and pension schemes, but also the entire economic infrastructure. For example, labor supply will shrink from 2010 onwards in absolute numbers, which is unprecedented in recent economic history. This raises the question of how to handle the increasing demand for labor from, for example, the healthcare sector. The housing market will probably also be affected by demographic changes. And it is also highly likely that capital flows will drastically change in the coming decades due to ageing populations in developed countries. Although a great deal of research has already been undertaken in these fields, many questions have yet to be answered. With its broad research agenda, Netspar can contribute to filling this gap. And we are proud that DNB contributes to Netspar s research by delivering researchers and the DNB Household Survey. DNB has been heavily involved in the pension industry since it merged in 2004 with the PVK, the former pension supervisor. The interaction of the economic and supervisory tasks of DNB has contributed to a significant deepening of our in-house knowledge of ageing and pension issues. This has become very clear for me in the past year. education Netspar has initiated an innovative Master of Science program that proceeds from a coherent set of societal questions rather than from a disciplinary toolbox, as is the case with many MSc programs. Moreover, researchers from several Dutch universities contribute to this MSc program. The program, which was accredited by the Dutch Accreditation Authority (NVAO) and approved by the Dutch Ministry of Education, started successfully in September The quality of its educational program is rooted in Netspar s intellectual credibility and visibility on the academic level, and in the power of the ideas generated by its scientific research. More than thirty students with an adequate mix of nationalities participated in the first year. This mix of nationalities stimulates discussions on the advantages and disadvantages of different pension schemes, and may in the future be instrumental in exporting pension knowledge. By serving as interns with our partners, the students are well placed to bridge the gaps between academia and the practice of the pensions and insurance sector. knowledge exchange Netspar has actively contributed to the strategic thinking in the pensions- and insurance sector through discussion papers, press publications, presentations at conferences, expertise service, etc. on many relevant topics. Examples of topics covered include the Dutch and international solvency regulation for pension funds and insurers (FTK, Solvency II), market valuation of pension and insurance contracts, the costs and benefits of DB pension schemes, generational accounting, the pros and cons of choice options in pension contracts, the sustainability of the pension system and the government budget in view of aging, the transparency of the pension contract (including the indexation label), and the life-course arrangement. Netspar s scholars are regularly asked for second opinions on policy documents by trade unions, pension funds, insurers, and ministries. Also journalists often approach Netspar scholars to ask them about their views on policy issues. Their contributions to addressing relevant policy questions are rooted in the recent literature. Netspar is already recognized as an important and influential place for strategic thinking and debate on the future of pensions in the Netherlands. This is evidenced, among other things, by the presence of the major players in the Dutch pension and insurance sector at brainstorm meetings and at the annual anniversary meeting of Netspar. In these meetings Netspar has addressed a variety of topics ranging from intergenerational risk sharing to the opportunities for export of pension products and competition in the pensions and insurance sectors, and from behavioral biases in choices related to pensions and insurance to transparency on indexation entitlements in the pension contract. data Netspar has initiated major steps forward in the availability of data for empirical research on aging and pensions. Statistics Netherlands (CBS), Netspar and its partners will collaborate further on improving the availability of micro data on pension rights. As a result, a large number of relevant new policy questions can now be addressed, and many research projects (also by international researchers) and theses will benefit from the improved data infrastructure. looking ahead expanding on an international level One of the challenges for 2007 is to further stimulate social innovation. Toward this end, we need to keep encouraging the best brains in academia to pursue cutting-edge research on pensions and aging. Furthermore, we should follow up on our commitment to promote stronger pension systems everywhere in Europe. The need for a stronger capital-funded occupational pension system in other European countries could lead to important business and investment opportunities for Dutch insurers and banks. Also, pension funds and pension administration companies are considering how they can export their considerable expertise in pensions. This will strengthen the political base for European regulations that better suit the Dutch pensions system. Although Netspar already has contacts with the foreign institutes that address related research questions, these contacts should be intensified in the near future. We plan to investigate the possibilities for setting up an international network together with similar initiatives within the EU. Expanding the network on an international level can be achieved through an active visitors program, the availability of research grants for international researchers and the organization of international academic conferences and workshops that last more than a single day. The bi-annual Pension Workshops will be extended to international conferences. More activities will be organized in cooperation with foreign partners (such as ICPM in Toronto). A number of instruments will be utilized to generate more direct contacts with partner representatives. intensifying the knowledge transfer Netspar s other key priority for the next period is to intensify and broaden the contact with the non-academic partners. Some Netspar researchers have established fruitful and lively contacts with a number of non-academic partners and professionals in the sector. More researchers should be involved, however; more individuals in the sector should be reached directly, and the contacts with others should be intensified. A number of instruments will be utilized to generate more

10 12 netspar annual report 2006 direct contacts with partner representatives. These include presentations by Netspar partners of their views on the most relevant research questions, small-scale thematic meetings with specialists, master theses through internships supervised by Netspar researchers on a subject directly relevant to the partner, regular visits to promote Netspar internally in the partner organizations, discussions by professionals from the sector on Netspar Economic Advisors (NEA) papers and panel papers, sounding boards linked to each of the Netspar themes, and participation of young professionals in the MSc program. Finally, the Netspar-UMBS Academy was launched in close cooperation with Maastricht University Business School, and offered its first modules of international post-academic courses in early This initiative adds an academic and international orientation to the training opportunities that are currently available in the sector. Whereas the innovation debate often focuses on technological innovation and the need for closer networking between industry and the technical sciences, Netspar links the social sciences to the financial sector and the public sector. Netspar serves as an important entrepreneurial role model on how academic institutions working on the social sciences can cooperate with the public and private sectors. Indeed, it has been named as such by NWO (MaGW), VSNU and the Innovation Platform. An agreement was made with four Dutch organizations that represent the pension funds and insurance companies (Verbond van Verzekeraars, Vereniging van Bedrijfstakpensioenfondsen, Stichting Ondernemingspensioenfondsen, Unie van Beroepspensioenfondsen). This agreement enables Netspar to disseminate knowledge to all pension funds and insurers, and will be instrumental in improving access to relevant datasets. It will also contribute, no doubt, to more intensive knowledge transfer.

11 research on the macro, meso and micro levels 15 Research Netspar has initiated three research programs that examine the micro-, meso- and macroeconomic aspects of pensions and aging. We explore the behavior of individual households in labor and capital markets within the context of the life cycle (micro). We investigate the role of pension funds and insurance companies in facilitating risk sharing within and between generations (meso). We analyze linkages among labor-, capital- and commodity markets including the relationship between retirement decisions, the flexibility of the labor market and incentives to accumulate human capital (macro). Every year, Netspar allocates 1 million to three theme-based projects; the annual awards are given for a three-year period. progress in 2006 In 2006, Netspar produced 99 academic publications and 58 discussion papers, which are listed in the appendix. Moreover, some ten research-oriented conferences were organized, nine students started work on their dissertation, and three more researchers were recruited on the international job market. The year was marked by the introduction of Netspar s first three research themes. Netspar has been focusing on expanding the contacts with the pensions sector, making the network visible outside Tilburg, and anchoring its research themes with the partners. As of September 2006, one of Netspar s leading research themes is valuation and risk management. The focus on valuation and risk management has shifted from the Dutch solvency rules (FTK) to the international Solvency II rules. Netspar s research also targets the optimal pension contract for different age categories, and the question of how much freedom of choice is the most beneficial to participants in pension schemes. At the micro level, Netspar is conducting a survey into if, and how, financial stimulus or health problems affect a decision to early retirement. Netspar has made considerable progress in making relevant data accessible in order to answer scientific questions. Due to cooperation from pension funds, insurers and universities, which are supplying Statistics Netherlands with data, we are able to get a much better view on issues such as the nature of the people who are taking early retirement: what is their health, what is their income, their possible pension gap and subjective life-expectancy? In addition, and due to a government grant, Netspar researchers are developing new ways of gathering data and conducting surveys. The availability of unique data is an important point of consideration for foreign researchers to participate in Netspar. It is likely that in the future more foreign scholars will work on Dutch policy issues. In order to facilitate exchange between the Dutch pensions sector and the rest of the world, Netspar has designed a visitors program that allows foreign scientists to visit Netspar. Last year, a dozen researchers from abroad visited Netspar for a couple of days. Furthermore, we are looking forward to the results of the eight foreign researchers, who were each provided by Netspar with grants of 5000 euro to study relevant pension issues in the Netherlands. results Although it is difficult to measure concretely the effects of Netspar s research, there are clear indications of results. The recovery period for pension funds as part of the FTK has been extended from one year to three years. The FTK parameters have been changed as well. Furthermore, Netspar has developed the so-called indexation label. This aims to offer workers greater insight regarding their pension prospects. Instead of the complicated indexation matrix of pensions regulator De Nederlandsche Bank, which mainly refers to expected purchasing power, Netspar has added risk considerations. Moreover, we have proposed graphical illustrations, similar to the Financiele Bijsluiter on investment risks that must nowadays accompany financial products. As a final example, the conclusion of academic research that the choice of investment by pension schemes participants must be accompanied by proper advice has now been widely accepted. Netspar has clearly contributed to a convergence of ideas. the ultimate objective In December 2006, researchers were granted subsidies for three new theme projects. They will investigate how pensions affect retirement and saving decisions, survey the development of health policy strategies to alleviate the effects of aging, and investigate the optimal design of a three-pillar pension system from a macroeconomic perspective. These themes are described on page 23 of this report. Our network is innovative by crossing interdisciplinary borders. Because Netspar gets its inspiration from questions arising from the pensions sector, we have involved the medical sector, for example, to tackle issues like life expectancy, and we have asked psychologists to find answers on choice behavior. In drawing researchers involved in diverse disciplines from all over the world to share their expertise on retirement and pensions, Netspar aims to meet the ultimate objective to stimulate prudent retirement and savings decisions and to engender cross-generational solidarity.

12 16 netspar annual report 2006 research on the macro, meso and micro levels 17 Richard Weurding emilie schols general director association of insurers (verbond van verzekeraars) official support of pensioenkijker.nl Netspar is conducting a survey on the public s opinions about It is reasonable to expect that the trend towards greater pensions. How does the public see the future of the AOW, and what individualization and more dominant market forces will continue over do they think of the additional pension? The survey is conducted the coming years. Still uncertain as yet, however, is whether political periodically, so that any developments can be clearly seen. This efforts to include more of the workforce in direct participation, information is interesting for Pensioenkijker.nl because it is really and therefore more support for the AOW, will succeed. The fact that useful to know what people s thoughts on their pension are so that employers want to control their pension burden is less doubtful; in we can try to make people more aware of their pensions. cases where that control is not, or is less, possible, they will place the risks with the employee. And it is quite clear that intergenerational In 2006, therefore, Pensioenkijker.nl welcomed the opportunity of solidarity will become less and less a matter of due course. Our cooperating in the survey with Netspar. The cooperation is good not attractive and solid-looking three-pillar pension system turns out only for Pensioenkijker.nl, but also for Netspar, because Pensoenkijker. to be rather vulnerable when stock market prices are disappointing nl usually generates very positive media attention: A real win-win and in those cases, too, the disappointments are being shifted to the situation! participants. In addition to the current survey, it would be useful to conduct In our country, 70 percent of the last-earned wage is the inviolable measure for the pension, as the 65th birthday was, for years and years, the date upon which one started to enjoy that pension. The pension income was collected using a particular type of solidarity that workers in the same workplace, or within the same branch of industry, had between them. The issue is how these norms and structures will be able to uphold this solidarity over the coming years. a survey to discover the level of public support for solidarity. Before this research can be undertaken, we will need to map out which redistributive mechanisms are now at work in the pension system (both the first- and the second pillars). This is especially important vis à vis the hidden rearrangements, because solidarity can be maintained in the long run only if there is enough support for it. Conducting such a survey may prove complicated, but will The discussion about a new old age should therefore be concentrated on new norms and structures The discussion about a new old age should therefore be concentrated on new norms and structures or, as one might say, the basic principles of a future-proof old-age pension. What are the standards today, vis-à-vis being reasonable? Can new solidarity play a role, and how will that role be organized? These are the important questions. Further, can the discussion on a new method of implementation be seen separately from this? This, too, is an important question, because in our country there is an ongoing discussion about whether, from a European point of view, the obligation has reached its best before date. To doctor with the implementation at this point in time dangerously resembles renovation of a house when it is not known how solid its foundations are, or who is going to live in it and what housing wishes this new owner might have. nevertheless be a valuable exercise. Pensioenkijker.nl welcomed the opportunity of cooperating with Netspar

13 18 netspar annual report 2006 netspar events 19 Annual Conference with CPB and SER, The Hague, April 24-26, L. to r. Wouter Bos (Leader Labour Party PvdA), Lans Bovenberg (Netspar) and Aart Jan de Geus (Minister of Social Affairs) Nobel Prize winner James Heckman (U of Chicago) 3. Ruud de Mooij (CPB/Netspar), author of the report Reinventing the Welfare State Brainstorm meeting on Indexation Quality, Tilburg, May 10, Klaas Knot (DNB) Pension Day, Tilburg, May 11, Jan Koeman (SZW) 6. L. to r. Jan Potters, Frederic Vermeulen, Karin van der Wiel (Netspar researchers) Netspar Workshop with PGGM, June 12-13, Michael Hurd (RAND) 8. Peter Diamond (Harvard University) 9. Jan-Willem Oisterwijk (Mininstry of Economic Affairs), Heino van Essen (PGGM) and Lans Bovenberg (Netspar) Start Master Economics and Finance of Aging 10. Drinks with students, September 2006 Brainstorm Meeting on Aging and the Sustainability of Dutch Public Finances, The Hague, April 11, Panel discussion with l. to r. Harry Verbon (UvT), Casper van Ewijk (CPB), Lans Bovenberg (Netspar), Bert de Vries (former politician/ Netspar fellow) and Bas Jacobs (UvA/Netspar)

14 20 netspar annual report 2006 pieter omtzigt mp for the cda The most discussed speech in Dutch politics took place at the Netspar congress in April 2006: Wouter Bos, leader of the Dutch labor party, announced his plan to raise taxes on the AOW (social security). With this step he clearly took a position in the debate on the ageing population and started the election campaign with an academic lecture a first. It is a pity, then, that Assar Lindback s (Stockholm University) reaction during the congress to Bos argument received so little attention when he subtly explained the flaws of the Scandinavian model, to which Bos was so devoted. Unfortunately, the discussion about how to get the best out of the Dutch as well as the Scandinavian model has stagnated somewhat after that. Pension funds have become the most important capital providers by far The internationalization of pensions and the ageing population is a subject that is going to demand more and more attention. Pension funds have become the most important capital providers by far and that raises a host of questions surrounding, in particular, what investments they are allowed to make. The Zembla television broadcast in 2007 about pension fund investments in child labor and landmines is likely to be just the beginning. Although it is clear that the pressure to pursue political goals with this capital will increase, we might ask why these funds take the capital away from their homeland and invest it elsewhere? And how do we deal with a new type of international player? A fund can move around quite freely, and whereas national welfare states may be able to fight with each other about mobile capital and investments, they have, in practice, virtually immobile human resources.

15 thematic approaches: scope for entrepreneurship 23 Thematic approaches Scope for entrepreneurship Netspar s themes are intended to stimulate entrepreneurship (researchers initiate research projects that are both exciting from an academic point of view and are relevant to Netspar s non-academic partners), engender commitment (researchers and their universities are able to showcase themselves), and generate coherence in the overall research program (and increase in scale and intensity). Themes involve all three pillars of Netspar: research, education and knowledge exchange. This section provides an overview of the six current themes. themes 2006 The first three themes were selected in December 2005, and commenced on April 1, This section indicates the scope of each theme and provides a short impression of the initiating event. theme 1: valuation and risk management for insurance companies and pension funds coordinator: antoon pelsser (uva) Pension and insurance sectors are facing unprecedented challenges at the beginning of the 21st century: Equity markets have fallen dramatically, interest rates are at historic lows, and people are living longer than ever before. At the same time, new tools are becoming available to address these challenges. Actuaries and actuarial science therefore need to enhance their skill sets. The management of financial risks together with classical actuarial risks is an area requiring further research. This theme is designed to stimulate research precisely in the area where finance and actuarial science meet. The primary application of this theme is risk management and asset and liability management by pension funds and insurance companies, focusing on internal risk management and external supervision and regulation. To kick off this theme, the group of researchers affiliated with this theme jointly organized a seminar with the Dutch Actuarial Society, in November 2006, on market-consistent valuation of insurance contracts. The group presented their theme and provided examples of the type of research they want to do in coming years. Several speakers from academia (Hans Bühlmann and Mario Wüthrich (both Zürich), Torsten Kleinow (Edinburgh), and Antoon Pelsser (UvA) explained the cuttingedge developments in academic research. Several speakers from the pensions and insurance sectors (Guus Boender, Hens Steehouwer (both Ortec), John Hele (ING) and Niels Kortleve (PGGM)) also indicated how the new concepts of marketconsistent valuation are being applied in practice. With close to 150 participants from insurance companies, pension funds, consultancy and academia, the kick-off event was a great success. theme 2: income, health and work across the life cycle coordinators: maarten lindeboom (vu), eddy van doorslaer (eur) In recent decades, most OECD countries have achieved significant improvements in both the average lifespan and the quality of life of their populations. The growing life expectancy of most Western populations entails many new challenges. If aging simply implied an expansion of the healthy and productive lifespan, it would not be considered the challenge that it is today. Unfortunately, much of the expansion consists of an increase in the number of years in declining health, accompanied by greatly increased healthcare needs and associated expenditures. As a result, most OECD countries face formidable new challenges for their largely publicly financed healthcare systems and for the optimal balance between active working life and the post-retirement, care-dependent years. Major dilemmas with respect to the sustainability of current retirement and disability programs, and the affordability of equitable healthcare systems, must be addressed. All themes run for a period of three years. Each year, three new themes are selected. The various research projects of the senior researchers will thus become gradually more integrated into coherent research programs. As Netspar increases the funding for themes, less funding will be available for individual researchers who are not part of a theme. The theme coordinators, the intellectual leaders of Netspar, recruit senior and junior researchers and Ph.D. candidates, and provide focus and direction. By April 2008, Netspar intends to run nine themes. Every year, one-third of these themes will be replaced by new themes. Netspar will thus continuously adjust its portfolio to new developments in the academic world and the changing interests of its non-academic partners.

16 24 netspar annual report 2006 thematic approaches: scope for entrepreneurship 25 alexander rinnooy kan chairman of ser The year 2006 was of course the year of the new law on pensions, but it also was the year during which Netspar developed into a well-recognized and well-respected participant in the national and international pension debate. Such an institute probably does not need outside suggestions on what to put on its agenda. Nonetheless, with due modesty, I may be able to help in pointing out an opportunity out there that Netspar has not fully benefited from. The kickoff event on December 14, 2006 was labeled Health Income and Work across the Life Cycle, and was attended by 80 academics and practitioners from the Netherlands and abroad. The morning session addressed the health at old age and included internationally renowned speakers such as Adriana Lleras Muney (Princeton), Gerard van den Berg (VU) and James Banks (UCL). The session concluded with a general discussion presented by Johan Mackenbach (EUR). Health and work in the last stage of working life was the central topic of the afternoon session, which included Rena Conti (Chicago), Norma Coe (UvT) and Mark Duggan (Maryland). Arie Kapteyn (RAND) rounded off the event with a vivid discussion. of integrated financial and pension planning. Eduard Ponds (ABP) used generational accounting to show which age cohorts gained and lost from the recent changes in pension plans. Casper van Ewijk (CPB) added a macroeconomic perspective to the financial analysis. themes 2007 In December 2006, three additional themes were selected, which will commence in April There is a huge knowledge gap that needs to be bridged Most of Netspar s research is fairly abstract and complex that should come as no surprise. It concerns issues such as intergenerational risk sharing, time-varying bond risk premiums, and the impact of wealth on the job exit rates of elderly workers, to mention just a few examples. At the end of the day, however, this research has to derive part of its relevance from how it will translate into the discussions and negotiations between the representatives of employers and employees on the contents of their pension plans. And there, as demonstrated by ample evidence, the average employee has only a vague idea regarding the terminology referred to above, and more worryingly, probably has little insight regarding the relevant details as to his or her own pension plan. There is thus a huge knowledge gap that needs to be bridged, for Netspar s sophistication to yield its full return. May Netspar play a role here? Netspar, together with its partners, may be uniquely positioned to think of ways or develop tools to enable a more effective communication process between the negotiators of pension plans and the people they represent. theme 3: private retirement provision coordinator: peter schotman (um) The provision of retirement income has long been dominated by mandatory arrangements with scant room for individual choice. Individual choice, however, is becoming increasingly important within collective defined-benefit arrangements. Moreover, individual schemes with more scope for individual discretion are sometimes proposed, including private retirement and lifecycle accounts based on defined contributions. In any case, in addition to collective pension rights, households build up private savings and investments in financial assets, housing and human capital. These developments place more responsibility on individuals to make informed decisions about retirement savings and investments. People must be able to estimate not only how much wealth they will need to accumulate by the time they retire, but also what risks are involved. To execute their plans, they invest in mutual funds, or use the services of intermediaries, such as insurance companies and pension funds. During the pension day of November 22, 2006, Jiajia Cui (UvT) presented her work on longevity bonds, explaining the theoretical framework for pricing such instruments and providing initial empirical results. In his discussion, David Schrager (ING) contrasted the theoretical approach to the industry practice of pricing longevity bonds using the concept of Economic Capital. Piet Eichholtz (UM) examined the longrun relation between house prices and rents. The discussant, Clemens Kool (UU), welcomed the evidence from more than three centuries of historical data, which prompted many new economic questions. Mutual funds perform much worse than pension funds, according to Rob Bauer (UM). As a potential explanation he discussed economies of scale and misalignment of interests. Laurens Swinkels (Robeco) countered some of the differences by comparing the perspectives of pension funds and mutual funds. Theo Nijman (UvT) explained the newly developed label of indexation quality of pensions. Bad indexation does not necessarily imply poor pensions, however, replied Guus Boender (Ortec), who further argued in favor theme 4: pensions, savings and retirement decisions coordinators: rob alessie (uu), arthur van soest (uvt) Occupational pensions, third-pillar products, and social security benefits are aimed at guaranteeing sufficient income and financial security for the elderly. Policymakers, pension funds and insurance companies must know whether the financial security they provide serves the population in an optimal way. This theme focuses on the microeconomic aspects of this broad question. As in many other western countries, the Dutch population is characterized by heterogeneity in terms of skills and human capital, income, consumption, and wealth accumulation, labor market history, labor market performance, job and pension fund mobility, family composition and family and other social networks, health and health-related behavior, future expectations, preferences for consumption versus leisure, risk aversion and time preference, financial literacy and procedures for decision making, etc. This theme aims to analyze the behavior and well being of the Dutch elderly workers and retirees in relation to their pensions and social security provisions and other environmental factors. theme 5: the macroeconomics of pension reform coordinator: casper van ewijk (cpb) This research theme focuses on macroeconomic aspects of pensions. The starting point is the three-pillar pension system featuring state pensions (1st pillar), mandatory supplementary pensions (2nd pillar) and free individual savings (3rd pillar). Key questions are what weight should be given to each of the pillars, what is the optimal pension contract in each of these pillars, and what is the government s role in shaping the pension system. In order to answer these questions, attention will be given to the optimal pension contract in each of these pillars, the interrelationship between the pillars and the impact of the pension system on the economy as a whole. The theme integrates results from microeconomic analysis into macroeconomic models, and applies these models to analyze relevant policy issues. The analysis will be carried out on both a theoretical level and

17 26 netspar annual report 2006 an empirical level using applied general-equilibrium models for the Netherlands. These models build on the model used previously by CPB in its work on aging and pensions, but will extend it in two important directions. First, risk and the valuation of risk will be introduced in macroeconomic models, thereby building on the results of other Netspar themes. Second, the models in this theme will extend the analysis of general equilibrium effects of shocks in pensions on labor markets and financial markets, on both a national and an international level. Netspar s position As a public-private partnership, Netspar is uniquely positioned to build links within the pension and insurance sectors. By enabling the various participants to network with each other and to discuss longer-term strategic issues, Netspar aims to strengthen mutual trust, open channels of communication, and build common visions. theme 6: living longer in good health: prospects, strategies, and consequences coordinator: johan mackenbach (EUR) The 20th century rise in life expectancy is one of the great successes of public health, but has contributed importantly to the aging of western populations. Aging poses great challenges to the modern welfare state, not only by threatening the sustainability of pension systems, but also by inducing a greater demand for social services, including healthcare. There is an urgent need for developing strategies that can help to alleviate the societal consequences of the aging of populations. Unfortunately, the ill health that tends to accompany aging is often seen as only an independent variable, leading to higher rates of morbidity, work disability, and demand for health- and social care services. Substantial evidence suggests that many manifestations of ill health at advanced ages are amenable to intervention e.g. prevention by lifestyle improvement or early detection, treatment by drugs or surgery, and functional rehabilitation by training and devices. The healthcare system should therefore not only be seen as part of the problem, but also be used as part of the solution. Developing a strategy to alleviate the societal consequences of aging of the population is no easy task, however. The main challenge is to delay morbidity and/or its consequences (functional decline, disability, dependence on health- and social care services) until a later moment in the human lifespan.

18 the importance of data 29 The importance of data One of Netspar s goals is to provide the best possible data infrastructure for public policy research. A crucial element is the availability of empirical micro data, which can be used to test and either falsify or confirm hypotheses and theories about the labor of individuals and households, socioeconomic position, health, and well being of individuals. Such data are particularly crucial to achieve the goals of Netspar s micro-research program, which focuses on individual labor issues such as savings for retirement, portfolio choice, health, labor supply and retirement. Netspar is involved in several projects to obtain facilities for researchers to access relevant micro data. cooperation with dnb and centerdata: dnb household survey and centerpanel CentERpanel is an ongoing socioeconomic survey with a sample of about 2,500 households that are representative for the Dutch population. Interviews are held via the Internet, and each participating household gets questions every weekend. Participants who do not have Internet are provided with the necessary equipment (a set-top box, and, if necessary, a television set). The DNB Household Survey (DHS), derived from annual interviews with participants in the CentERpanel, has collected data since 1993 on the financial behavior of households. Areas covered include demographics and work; housing and mortgages; health and income; assets and liabilities; and a large number of economic psychology topics. The rich questionnaire has resulted in a unique amount of information on a wide variety of topics. The technology also allows easy addition of new modules in separate weekends; this information can be combined with the DHS data. Several researchers use CentERpanel for their Netspar research, exploiting existing data or fielding their own modules and experiments. Jan Potters and Eline van der Heijden carried out an experiment on time preference, loss aversion and myopic decision making, relevant for how households invest in third-pillar pensions. In the same line of research, Johannes Binswanger and Daniel Schunk (Mannheim) will do an experiment on satisfying labor in choice of pension plan. In cooperation with Pensioenkijker.nl, Arthur van Soest and Jan Nelissen (CentERdata) will set up the Pension barometer, measuring individual satisfaction with the pension- and old-age social security system and confidence in its long-run future. cooperation with statistics netherlands (cbs and netspar partners): register data on income, wealth, pensions and retirement plans A category of data that is gradually becoming more common and more popular is register data (also called administrative data). These data are collected for administrative purposes (e.g. by the tax authorities or the employment office). In the Netherlands, several sources of administrative data with rich information on households and individuals on, for example, income sources, labor market histories and wealth components, are managed by Statistics Netherlands (CBS) and made available to researchers under stringent (security) restrictions. Since 2005, Netspar cooperates with CBS to give remote access to this type of data to Netspar researchers. Klaas de Vos, for example, used this data to compare income and wealth holdings with DHS; Jannes de Vries is using it to study income mobility. The new theme project Pensions Savings and Retirement Decisions, led by Rob Alessie and Arthur van Soest, will, in addition, use register data from pension funds to analyze future entitlements to pensions and social security, and to forecast the future distribution of income among the elderly, as a whole, and vulnerable groups, in particular. In the same spirit, Rob Euwals will use administrative data to analyze early retirement decisions. Gerard van den Berg and Maarten Lindeboom work with historical administrative data on health and socioeconomic status, going back to the previous century. They will use this to analyze the long-run causal relationship between socioeconomic status and health. Since administrative data typically do not contain all of the information a researcher would like to use, linking survey data to administrative data is an attractive option. Until now, this has rarely been achieved, but this is something Netspar researchers will also pursue in the future. Arie Kapteyn has done pioneering work in this field, but until now has used only Swedish data. share europe: a survey of health, ageing and retirement in europe Netspar has continued to be pivotal in its involvement in the international Survey of Health, Ageing and Retirement in Europe (share) through several EU-funded projects (share, amanda, share-i3, compare). The projects are contracts with the European Commission, which has identified population aging and its social and economic challenges to growth and prosperity as one of the most pressing challenges of the 21st century in Europe.

19 30 netspar annual report 2006 netspar events 31 Brainstorm meeting on the 12th report of the Studiegroep Begrotingsruimte, The Hague, October 11, From left to right: Syp Wynia (columnist Elsevier), Frank Kalshoven (columnist De Volkskrant and director Argumentenfrabriek), and Coen Teulings (CPB/Netspar) debating 2. Discussion with the audience 3. Sweder van Wijnbergen (UvA/Netspar) Workshop Micro-economics of Aging in Europe, November 16-18, Gerard van den Berg (UvA/Netspar) addressing a complicated issue 5. James Banks (Institute for Fiscal Studies) Pension Day with UM, Maastricht, November 23, Rob Bauer (UM/Netspar) in his presentation Economies of Scale, Lack of Skill or Misalignment of Interest? 7. Piet Eichholz (UM/Netspar) explains why 8. Lunch in the chapel: why not? Nederland Pensioenland II, November 29, Debate over diner, l. to r. Jacqueline Lommen (DNB), Richard Venniker (Min. of Finance) and Harry van Dalen (NIDI) 10. Inge van Hoek (Sterreborg) pointing out 11. Lans Bovenberg (Netspar) reflecting

20 32 netspar annual report 2006 During 2004, the first wave of share recorded health, work, economic status and family and social networks of over- 50s in eleven countries in continental Western Europe, from Scandinavia to the Mediterranean. The multidisciplinary survey recorded the situation on national differences and its implications on healthy and active aging. In the Netherlands, some 2,700 respondents took part in the study. Netspar researchers involved in the project are Arthur van Soest (Dutch team coordinator) in Tilburg, Johan Mackenbach at Rotterdam s Erasmus Medical Centre, and Rob Alessie of Utrecht School of Economics. The results thus far have led to the international report 50+ in Europe. The report showed, for example, that ties between parents and their children are particularly close in the Mediterranean countries, and that people who enjoy their work retire later. And whilst almost two-thirds of retirees in the Netherlands and Sweden have an additional occupational pension, the European average is 20%. The share data are freely available to the entire research community. indicators for key concepts of EU policy such as pension replacement rates, retirement incentives, savings adequacy, disability rates, health status, prevalence of health conditions, and well-being of the elderly. Within the Netherlands, the data collected in 2004 are being analyzed by approximately fifty researchers from most Dutch universities and several national institutions, such as the Social and Cultural Planning Office (SCP) and the National Institute for Public Health and the Environment (RIVM). Amongst the users of share data are the Netspar researchers Frederic Vermeulen and Gema Zamarro. The data gathering for the second wave of share will be completed in the summer of The information will become available in the autumn of this year. Netspar researchers were involved in the preparations for the second wave of share, which commenced on 1 November The project aims specifically at the changes over time, using the data gathered earlier for comparison. It will also look for answers to related hypotheses on labor such as, for example, will people save more when tax-friendly ways of retirement savings are introduced? And will they retire later if early retirement arrangements are made less generous? Arthur van Soest coordinates the compare project, which aims mainly to develop standardized tools for EU-wide research. compare is part of the second wave of share, and uses brief descriptions of hypothetical people to determine the differences in evaluation norms across different countries. compare thus develops anchors that can be used in several domains, addressing crucial domains of European public policy. A total of twenty-one European universities, including Tilburg University and Erasmus Medical Centre, are taking part in the share s second wave. share has been extended from the initial eleven European countries, to the new EU countries Poland and the Czech Republic, as well as Ireland and Israel. Similar existing data from research in England (the English Longitudinal Study of Ageing, ELSA) and the United States (the Health and Retirement Study, HRS) will enable comparative studies that also include these countries. benefits of a sound data infrastructure The resulting new data infrastructure will enable researchers from a very broad set of disciplines to analyze the Europe-wide aging process. It will provide better insight into adaptive labor in retirement, saving and health service use, and will allow researchers to develop cross-nationally comparable