Additive is fair, but confusing

October 23, 2025

  
In a news item dated 28 April 2025, DNB made it clear that the so-called multiplicative method for allocating returns in the solidarity premium scheme is contrary to the Pensions Act. Article 10a, paragraph 5, requires that no redistribution between age cohorts may take place in advance. DNB argues that only the additive method meets this legal requirement. In this article, we show how the multiplicative method leads to redistribution and why the additive method is not without pitfalls in practice.

Additive versus multiplicative method

In the solidarity premium scheme, the individual pots are invested collectively, while the fund return is distributed according to a predetermined allocation policy for protection and excess return. The difference between the additive and multiplicative methods lies in the basis for the excess return. In the additive method, the excess return is distributed on the basis of the opening balances of the personal pension assets. In the multiplicative method, the excess return is distributed on the basis of the opening balances of the personal pension assets plus the allocated protection return.

This difference leads to systematic redistribution, as shown in the calculation example in Figure 1.

 

 

At the beginning of the year, we draw up an allocation policy that is in line with the risk appetite. We then invest the individual pots in a single collective investment portfolio that is precisely tailored to the promised protection against interest rate changes and exposure to excess returns. After one year, we allocate the realised collective fund return in two steps.

Step 1: Allocating the protection return

First, each participant receives the return for the passage of time on their entire personal pension capital. This year, that was 4%. Interest rates then fell from 4% to 3% this year. In this example, Middelman receives approximately €15,700 and Oudega approximately €9,500 in protection return for interest rate changes. According to the allocation policy, Jongeneel receives nothing.

Step 2: Allocating excess return

After the protection return has been allocated, the excess return from the collective fund return remains. The shares yielded 10% this year. Of this, 4% has already been allocated as return for the passage of time. This leaves an excess return of 6% (€7,500). In the additive method, the distribution key for the excess return is based on the relative ratio between the personal pots at the beginning of the year and the policy for the excess return. In the multiplicative method, the distribution is different. The collective excess return is now distributed on the basis of the pots plus the protection return from step 1.

Compared to the additive method, Middelman therefore receives approximately €170 (3.8%) more in the multiplicative method. Jongeneel misses out on the same amount, which for him is 5.7%. Oudega shrugs his shoulders at this redistribution of the excess return, because he will not receive any of it anyway.

Redistribution

The crux of the problem lies in the fact that, in the multiplicative method, the allocation of the excess return partly depends on the allocated protection return (from step 1). So, the greater the interest rate changes, the greater the redistribution effects. The redistribution increases when the differences between the personal pots and the policy for allocating excess returns are greater.
 

A pure allocation method is not only a legal challenge, but also a communication challenge.

  
In Figure 2, the interest rate at the beginning of the year is always 4%, but the interest rate change during the year varies.

Oudega in confusion

Let's return to Oudega and his personal pot of €100,000. Suppose we give him not 0% but 40% excess return in addition to 100% protection return. How does that affect his pot and benefit?

Step 1: Allocate protection return

Oudega has been promised that his benefit of approximately €8,600 per year is 100% protected against interest rate changes. Above, we saw that he receives a protection return for this, so that his pot increases to €113,500.

Step 2: Allocating excess return

Oudega expects his benefit to grow by 40% in line with the excess return of 6%. That is therefore 2.4%. If we allocate the excess return using the additive method, Oudega will receive £100,000 x 6% x 40% = £2,400 in his pot. His pot of £100,000 will therefore increase by 2.4%, as expected.

But what does that mean for his benefit? At the beginning of the year, the ratio between his pot (€100,000) and his benefit (€8,600) was 11.63. Due to the protection return, his pot has increased to €113,500 and that ratio is 13.2 at the end of the year. This means that his benefit increases by €2,400 / 13.2 = €182 due to the excess return. So his benefit has increased by €182 / €8,600 = 2.12%. Oudega: “Huh, my benefit was supposed to increase by 2.4%!?” What would your answer be as a director if you received a phone call from Oudega?

In the multiplicative method, the percentage by which the pension assets are increased is equal to the percentage by which the benefit is increased. This method is therefore easier to explain in this respect.

Although the additive method is legally correct, this case shows that this method can also result in a difference between the theoretically promised exposure to excess returns and the actual effect on the benefit. Pensioners in particular will use their pension benefit as a reference point rather than the development of their individual pension assets. Pension funds would be wise to take this into account by communicating what participants can actually expect. A pure allocation method is therefore not only a legal challenge, but also a communication challenge.

Attachments

• FI-6 - 2025 - SemWet Rik Albrecht.pdf