A major pension reform in the Netherlands could deliver better returns for Dutch workers. But it may also make it more expensive for European governments to borrow.
Work-related pensions in the Netherlands are undergoing their largest reform in decades, moving away from an outdated and inadequately defined benefits model. Being a fully backed system, the pension reform will lead to a reallocation of pension savings that will provide better returns to contributing employees and end large regulatory induced flows into long maturity government debt.
The reallocation in one of the world’s largest pension fund systems will subject European governments to a much steeper yield curve by removing a traditional forced buyer, thereby raising borrowing costs at longer maturities. These developments raise further questions about the sustainability of fiscal trajectory in large deficit running economies in the Eurozone, such as France and Germany.
The Dutch pension system — Europe’s largest, with approximately €1.97 trillion in retirement assets at the end of March 2026 — is being fundamentally redesigned under the Future of Pensions Act (Wet toekomst pensioenen, WTP), enacted in 2023 and effective from July 1 that year. Dutch pension reallocation is already underway; ING estimated that roughly €900 billion of assets could transition in 2027.
How the Dutch Pension System Is Changing
Pensions in the Netherlands are structured in a three-pillar system: the basic state-provided old age pension (AOW), work-related pensions, and private individual retirement savings. The WTP affects the second pillar. By January 1, 2028, these work-related pension schemes must move from current arrangements — predominantly collective defined-benefit (DB) arrangements — to one of two age-sensitive defined-contribution (DC) contracts that retain some collective risk-sharing.
Under the old DB arrangement, employees contribute a percentage of their income in return for fixed benefits (pension payments) upon retirement. Ninety percent of employees in the Netherlands contribute to such a work-related fund and receive pensions based on their average salary and years worked. The employer-employee split and the percentage of wages contributed are determined on a company or industry basis, often through Collective Labor Agreements with unions.
Funds can choose between two new DC schemes: the Solidarity Premium Scheme (SPR) and the Flexible Premium Scheme (FPR). The SPR manages all pensions under one investment policy but distributes investment returns to personal capital balances. Moreover, it includes a built in “solidarity reserve” capped at 15% of total fund assets, to support pensions in years when returns fall below individual fund determined objectives. During years with “excess return,” part of the return replenishes the reserve.
The FPR, by contrast, works through individual portfolios, with employees able to choose between low risk/return vs. high risk/return, active vs. passive asset allocations. Prior to the reforms, some company or corporate funds were already operating under DC models, most of which are transitioning to the FPR. According to the bank UniCredit, 80% of Dutch pensions assets are held by industry-wide funds, which, largely due to union preferences, are almost all likely to adopt SPR funds.
Under the reforms, existing pension savings will be transferred into the two new systems, and investment risk will become more closely tied to individual accounts: Younger members can bear more equity risk, while portfolios become more defensive as participants approach retirement. The Dutch government stated that reform also requires compensation for groups — particularly workers aged 40–55 — who may otherwise lose from the shift to uniform contribution rates.
Why the Reform Changes How Funds Invest
So far, so good.
Changing from a DB to DC system, individualizing pension accounting, and tailoring asset allocation to contributors ages are all sound reforms that will greatly benefit those paying into the pension system, particularly younger workers. One particularly significant advantage will be its effect on pension portfolio management.
The goal of the old system was not to attain the best return for the pensioner within reasonable levels of risk, but to meet defined future benefits with as little risk as possible.
Under the old DB system, funds were incentivized to invest in a mix of extremely conservative instruments (50-year swaps, 30-year bonds) to meet specific future liabilities (the pensions). Funds hedged the duration (interest rate sensitivity) of their liabilities by locking in long-term fixed rates to protect against declining interest rates. However, this strategy did not offer much protection against rising interest rates, according to a Review of Financial Studies paper by Kristy Jansen and others. Long-maturity swap positions — in which the fund pays a variable rate in exchange for receiving a fixed rate — left funds vulnerable to margin calls when interest rates rose. The authors calculated that these swap positions could lead to margin calls exceeding 6% of fund assets, necessitating large sales of their safest and most liquid assets.
What Happens When a Forced Buyer Disappears?
These sound and beneficial reforms, however, will put European sovereign debt markets under great pressure.
The Financial Times estimates that Dutch pension funds hold 8% of all German bunds and 19% of all Dutch government debt. The reform changes pension funds’ demand for financial assets as much as it changes their accounting. Under the old defined-benefit model, funds hedged collective liabilities with long-duration government bonds and receive-fixed interest-rate swaps. Under the new model, younger members’ assets can be redirected toward equities, credit, private markets and other return-seeking investments, while older members retain shorter-duration protection.
The Dutch central bank, DNB, estimates that Dutch pension funds could reduce their positions in government bonds and interest-rate swaps with maturities of at least 25 years by approximately €100–150 billion.
Against roughly €900 billion of outstanding euro-area government and semi-government bonds in this maturity segment, that represents an 11–17% market-scale adjustment, although the actual reduction in cash-bond holdings would be smaller because DNB’s estimate also includes derivatives.
The effect is expected to be concentrated in the 30–50-year sector. PIMCO estimates that the reform could reduce pension funds’ long-term interest-rate sensitivity by approximately €230 million in PV01(a measure of how much the value of a position changes when interest rates move by one basis point, or 0.01 percentage points). ING forecasts approximately 10 basis points of further steepening in the euro-area 10s30s curve by 2027 from pension reforms alone. The 10s30s is the difference between the 30-year and 10-year government-bond yields.
These reforms come at an inconvenient time for the finance ministries of France and Germany, two of the largest eurozone debtors by size of issuance. DNB expects positions with maturities of 30 years and above to be downsized just as the German government has massively upscaled its borrowing.
The disappearance of a large, price-insensitive buyer at the long end of the yield curve forces large issuers (such as Germany and France) with two choices: reduce the average maturity of their debt or pay higher yields on the long end to more price-sensitive buyers.
Ultimately, for Dutch citizens, not having their savings forced into low-return, long maturity sovereign debt is a positive development. Yet a steeper yield curve might tempt term structures to favor shorter maturities, creating more roll-over risk. If markets become warier of the fiscal trajectory of EU members such as France, more frequent rollovers would leave average borrowing costs more susceptible to snowballing. For now, Eurostat shows both Germany and France maintain long term structures with average maturities of 8.7 and 8.5 years, respectively. But even if they resist shortening maturities, higher borrowing costs will still appear in new long-term debt issuance, albeit without the increased rollover risk.
Either way, as in the United States, Japan, Australia, and the United Kingdom, borrowing is becoming more expensive. French borrowing costs are expected to soar 25% to €65 billion in 2026 according to an estimate by the Financial Times. German borrowing costs are expected to reach €42 billion in 2027, up from €30 billion in 2026, a staggering 40% increase.
The steepening of the yield curve, combined with the general rise in rates, raises fundamental questions about the path of fiscal policy in Europe.
Will finance ministers take these developments as signals to tighten fiscal discipline? Will European governments find new ways of engineering financial repression to replace the demand generated by the Dutch pension system? Or will higher interest costs accelerate and escalate deficits and lead to fiscal crisis?
