Private social protection against financial risks: Organising collective risk-sharing in Dutch and Danish pension funds

Welfare privatisation increasingly exposes households to financial market risks. Promoting collective risk-sharing arrangements within private pension schemes is an ambitious strategy to protect households against the risk of financial market volatility. This article proposes an analytical framework that helps to explain the political viability of efforts to re-create social protection within private welfare provision. It challenges the existing emphasis on the agency of social partners and their capacity to ‘fill the gap’ created by state retreat. Instead it proposes to shift analytical attention to the structural context in which these agents make their decisions. As collective risk-sharing always involves decisions with distributional consequences, governance rules play a crucial role in establishing and maintaining widespread acceptance of these decisions and trust in those who make them. A distinction is made between governance rules regarding the promised benefit outcome, and rules regarding the process of achieving a certain outcome. The article suggests that limiting discretion by fixing the process, rather than the promised benefit outcome, yields more stability in the longer term. To support this argument, a most-similar case study is constructed, comparing Denmark and the Netherlands during the two main financial crises since 2000. Dutch schemes arguably made explicit pension promises, but left distributional decisions to the discretion of governing boards. This created incentives to pocket investment surpluses, left them badly prepared for the crisis and sparked distributional conflicts. Danish schemes made few pension promises but had clear rules on how to deal with surpluses and deficits, preventing a similar scenario.