Reversed Solidarity in Pension Plans

There is a unexpected phenomenon in the majority of complementary pension plans in the Netherlands. Unlike other arrangements that are the result of collective bargaining and decision making, these pension plans increase the inequality in the distribution of (lifetime) income. In those plans, persons without a career contribute to the payment of pension provisions of those with a career. Generally speaking, this implies that blue-collar workers and women pay for the pensions of white-collar workers, who are mostly men. For some of the contracting parties, the terms of the pension contract seem to be disadvantageous and suboptimal. The question arises as to why these contracts are being concluded and how they can survive in a competitive environment. Moreover, since the pension plans are the result of collective bargaining between the organisation of employers and the labour unions, the question arises as to how reversed solidarity fits the alleged redistributive goal of the labour unions. The analysis leads to the following conclusions. Firstly, that information and transaction cost, collective agreements, legal barriers and market failures on substitute arrangements prevent the conclusion of optimal contracts. Secondly, employers would find the pension plan attractive because it discourages shirking, enhances productivity and the process of job matching and reduces labour turnover. Thirdly, a pension plan based on final salary is in the interest of the median voter in the labour union, who is older and earns a higher seniority wage than junior workers. Furthermore, in the given circumstances the pension plan enlarges union membership and the dues income of the union and endows the union leadership with more prestige and influence. Individual union members would not oppose such a pension plan for reasons of informational asymmetry, transaction cost and the inability to capture the full benefits of their actions.A comparison of the pension schemes of Belgium, Germany, France and the UK shows that there are large differences in the structure and content of retirement provisions. Reversed solidarity may also be part of the pension plans in Belgium and the UK.