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Employee solidarity is central to the second pillar of the Dutch pension system. This solidarity is given shape in collective schemes implemented by industrywide, company and professional group pension funds. The present book sets out to explain how solidarity works within collective pension schemes and to answer the questions: what groups participate in the solidarity mechanism and what are the financial stakes for each group? After reading this book the reader will be in a better position to form his own opinion as to whether the current collective pension system is desirable or not.

This opening contribution to the book Costs and Benefits of Collective Pension Systems, an initiative of the Association of Industry-Wide Pension Funds and the Erasmus University of Rotterdam, first discusses a number of general solidarity aspects. Next it deals with more specific issues that have an important bearing on the pension sector.

The collective pension system draws its strength and justification from collectiveity and solidarity. The conditions required to ensure broad-based consensus and acceptance must therefore be fulfilled at all times. Hence, the question arises what forms and degree of solidarity are desirable. Where does undesirable solidarity start? The outcomes will differ from one fund to the other and will also vary over time.

In the past few years pension funds have made important progress in introducing pension contracts. These contracts specify the relationship between the fund's financial position on the one hand and its contribution policy and indexation of accrued pension rights (of retirees and workers) on the other. In the coming years further arrangements will be made regarding diverse types of income and value transfers, also known as solidarities. Numerous questions arise waiting for an answer. Some tentative recommendations are made for the way forward.

This contribution describes the principal forms of solidarity in the healthcare sector. We discuss the concept of solidarity and its diverse roles as well as the design of the existing solidarity framework and trends for the future. Solidarity in healthcare is under pressure: the costs are rising and the distribution of solidarity transfers is becoming increasingly uneven, socio-cultural trends are sending out mixed signals and many think it is fair to ask people with unhealthy lifestyles to pay more. However, a fully funded system is less suited to healthcare than to supplementary pensions. In healthcare, more so than in the pension sector, solidarity is nurtured by feelings of community and justice. At the same time, egalitarian outcomes are increasingly difficult to achieve due to the evermore uneven distribution of the health cost burden, the enormous supply of healthcare products and the large mutual differences in the production process.

This chapter examines what type of pension scheme has the lowest operating costs. We first analyse the operating costs of Dutch pension funds, broken down by administrative and investment costs. Various cost-influencing factors are identified, including scale, pension fund type, plan type, outsourcing and reinsurance. Economies of scale are shown to be dominant in explaining differences in costs across pension schemes, leading to the conclusion that the consolidation of small pension funds could improve cost efficiency. In addition, the costs per participant of mandatory industry-wide pension funds turn out to be significantly lower than those of company pension funds. Next, the costs of pension schemes offered by pension funds and life insurers in the Netherlands are compared in an effort to distinguish between collective and private schemes. We find that the operating costs per participant of collective pension funds are many times lower than those of private schemes.

Pension solidarity can no longer be taken for granted. Due to demographic changes - and hence a growing retiree/employee ratio - additional contributions offer steadily fewer opportunities for clearing pension shortfalls. Together with the growing costs of contribution volatility and the trend towards short-termism, this means that the added value of solidarity is increasingly being called into question. A carefully argued and well-substantiated answer is therefore in order.

What is the added value of solidarity and what is an 'optimal' pension contract? This contribution seeks to provide a survey of what we can learn about these issues from the current academic literature and to identify those areas where further in-depth research is warranted. The starting point consists of the private and collective pension contracts that are perceived to be optimal in the academic literature. However, the practical questions regarding pension funds and the economic environment in which pension funds operate are considerably more complex than assumed in the literature. Additional research is necessary to answer the central questions concerning the added value of pension solidarity and the optimal form of pension contracts.

This contribution analyses how the assumptions and findings of the WRR study (Boender et al., 2000) relate to the customary assumptions in the academic literature. It specifies what we can learn from this about the added value of pension solidarity as calculated in that study.

The insights in this contribution do not result in a single uniform answer regarding the exact added value of pension solidarity and the precise form of optimal pension contracts. Our aim here is rather to arrive at a number of concrete research questions in order to gain a deeper understanding of the underlying considerations and to be able to build a bridge in the near future between the academic literature and complex reality.

Intergenerational solidarity is an important topic in the increasing interest in collective pension schemes. How great is this solidarity? Is there a balanced sharing of costs and benefits across age cohorts? The long-term sustainability of any pension scheme stands or falls by the willingness of members to continue to participate; the attitude of younger persons is crucial in this regard.

In this chapter we set out a method by which we can illustrate the way in which the value transfer between generations within an industry-wide pension fund occurs. This method - which we term value-based generational accounting - is ideally suited to investigating how far current policy itself, and changes to that policy, result in a balanced sharing of costs, benefits and risks across the generations participating in the pension fund. The method thereby also forms a good basis for justifying (in advance and in retrospect) the policy that is pursued.

We begin the chapter by explaining the method of value-based generational accounting. We deduce from this that a pension fund can be characterised as a 'zero-sum game'. A change in policy does not create extra value, but does result in a redistribution of value between the parties involved in the pension fund. We then examine the generational effects for a standard industry-wide pension fund the pension fund policy regarding investments, contribution rate setting and indexation policy.

We pay no attention on transfers between members as a consequence of the operation of the uniform contribution rate. We regard this practice as a given. The contribution by Boeijen et al. in this book deals specifically with the pay-as-you-go element from younger to older employees, making use of the technique explained in that chapter. In addition, value transfers can also occur within a cohort. This topic is the focus of the contribution of Aarssen and Kuipers in this book.

It is our view that the proposed method is a valuable addition in the evaluation of current policy and policy variations. The approach of value-based generational accounting should therefore form a part of the decision process regarding the financing policy of the fund. This can prevent undesirable and/or unintended value transfers between generations. The proposed method can assist in searching for a set of policy parameters whereby transfers do not take place, or if they do, they are of acceptable size.

In the current uniform contribution and accrual system, all members - irrespective of their age - receive the same pension accrual for the same contribution rate. This leads to large transfers between various groups of members, which makes the pension system vulnerable. The decreasing accrual system that we have analysed, in which each member pays the same contribution rate and in return receives a decreasing accrual depending on their age, does not suffer from these transfers. However, a switch to this system may entail undesirable social effects. Compensation for insufficient pension accrual for active members - upto a maximum of 20% of the liabilities - must be taken into account.

Within collective pension plans, the uniform contribution rates cause considerable redistribution. Women benefit more from the retirement pension than men, while benefiting less from the partner's pension. Single people benefit less from schemes than partnered members. The option of exchanging the accrued partner's pension for supplementary retirement pension has made the differences smaller, however. Additionally, the inequality between employees with longer and short careers has decreased due to the transition from final pay to average earnings schemes. When calculating their premiums, life insurers do make distinctions between characteristics of the members. However, the costs of private insurance products are so high, that nevertheless nearly everyone is cheaper off with a collective pension.

More than 90% of employees in the Netherlands compulsorily accrue pensions via their employer. Experiences abroad, supplemented by empirical research among Dutch households, suggest that, without this automatism, large groups of employees would build up much less pension. Procrastination, self-control problems, and limited financial knowledge and skills frequently lead to low pension savings and low returns on the accrued pension capital. Mandatory retirement saving prevents these problems. The Dutch mandatory participation works well and there is no reason for drastic modifications. What can be studied, however, is how mandatory retirement saving for the self-employed can result in a better pension build-up.

In the Netherlands, when representative organisations apply for it, the Minister of Social Affairs can decree a pension scheme as mandatory for a complete industrial sector. The majority of the employees accrue pension in a scheme that is imposed by this mandatory participation for companies. This chapter describes the creation and content of this mandatory participation, as well as the advantages and disadvantages. A comparison with other countries shows that the mandatory participation for companies succeeds well in its objectives, as it encourages saving behaviour, prevents 'blank spots' and avoids competition on labour costs.