Dutch pension administrator TKP has stood behind its decision to determine pension protection yields using a theoretical method, revealing that this has provided savers 21 per cent higher "pension prosperity" compared to a practical method.

Following the arrival of the new pension system, the Dutch pension funds opted to determine the protection yield using the theoretical method, rather than the practical method.

Now, TKP's research has found that the method offered “major advantages” for savers, including a higher expected pension, while the risks of their final pension payment were not proportionally higher.

Indeed, a theoretical method offered higher excess returns (4 per cent), interest rate hedging for young people (12 per cent), and better diversification in an integrated portfolio (5 per cent).

Meanwhile, the research also revealed that ‘inflation protection’ caused no additional prosperity for savers.

“Even if we look at the real (inflation-adjusted) benefit, inflation hedging appears to be neutral on average in the long term,” TKP added.

Overall, the firm said its analysis showed that the theoretical approach had
“significant advantages” over the practical approach.

“By adopting a holistic portfolio approach, in which the distinction between protection and excess return is blurred, more room is created for diversification.

“In addition, there is more room for illiquid investments, and the benefits of lifting the lending restriction can be optimally exploited,” it concluded.

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