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Netherlands: Sweeping pension reforms agreed

Investments|Retirement
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July 10, 2019

Prior to formal implementation, employers should consider these complex fundamental expected changes in any salary and pension planning.

Employer action code: Act

On June 15, 2019, the largest union federation (Federatie Nederlandse Vakbeweging – FNV) approved the agreement in principle on major pension reforms that was reached earlier in the month between the Dutch cabinet and the social partners. For several years, the Dutch government has been trying to develop a new framework for supplemental employer-provided pension plans to equalize them from an age-related perspective. Negotiations with the social partners were complicated by the unions’ insistence that the scheduled increases to the social security normal retirement age (NRA) be frozen before discussing reforms to supplemental pensions. A Willis Towers Watson audio recording explaining the agreed reforms (in English) can be found here.

Key details

Regarding the social security retirement age, the government has made the following commitments:

  • Slow down the scheduled increase in NRA by freezing it for two years at the current level of 66 years and four months; thereafter, it will rise to age 67 in 2024 (2021 under current rules) and subsequently increase by eight months (rather than a year) for each year of increased life expectancy from age 65. Draft legislation was approved by the lower house on June 20.
  • With employer agreement, employees will be able to retire up to three years before NRA, defer receipt of their social security pension to NRA and receive an employer-paid benefit of up to EUR 19,000 per year during the interim.

The new framework for employer-provided supplemental pension plans as outlined in the agreement will include the following provisions:

  • For all types of plans, the value of the annual pension accrual — as a percentage of the “pension base” (i.e., salary less an offset) — will not be allowed to vary according to the member’s age, a major difference from the current framework. In almost all current defined contribution (DC) plans, the value of the annual accrual (i.e., the contribution rate) increases with age; however, this would no longer be permitted. In current defined benefit (DB) plans, the pension accrual rate typically is independent of age, which means that the value of the pension accrual actually increases with age; again, this would no longer be permitted. Moving future accrual values to this new basis would result in flat contribution rates in DC plans and age-related accrual rates in DB plans (higher for younger members and lower for older members). Importantly, the agreement also requires that current employees must be compensated separately by their employers for any such resulting decrease in their pension accrual values. This compensation cost is roughly estimated at EUR 60 billion to EUR 100 billion in total nationally, and on average per employer at about two to three times the current annual pension contribution (the actual impact will depend on various factors, such as age distribution).
  • For pension funds only (i.e., not insured arrangements), a new type of “ambition” pension plan design option will be introduced, in addition to the existing ambition pension design. In an ambition plan, fixed rates of employer and/or employee contributions are paid to a collective pension fund (i.e., no individual accounts), which in turn provides members with annually adjusted pension benefits. The adjustments (both positive and negative) depend mainly on the asset returns and member longevity. The new ambition design will not offer benefit guarantees nor require funding “buffers,” in contrast to current plans. This new option is similar in certain aspects to the collective defined contribution arrangement currently proposed in the U.K.
  • Ambition plans will increase pension benefits immediately if the year-end funding coverage ratio is above 100% (currently partial indexation is only granted when the funding ratio is above 110%); however, ambition plans will also reduce pension benefits immediately if the year-end funding coverage ratio falls below 100% (currently only when the funding ratio is below approximately 104% for six consecutive year-ends or when recovery up to the required buffer level, generally around 120%, isn’t expected within 10 years).

In a separate but related development, on June 11 the Dutch National Bank announced an adjustment to the method for determining the discount rate used in measuring pension liabilities for funding purposes, effective January 1, 2021. The change is expected to lower the ultimate forward interest rate, which would result, all else equal, in higher pension liabilities and lower funding coverage ratios.

Employer implications

The accrual rate changes called for under the agreement will significantly affect nearly all Dutch DB and DC plans, and the associated required compensation to employees will represent a substantial cost for employers. Although the details are yet to be developed and released, and formal implementation isn’t expected before 2022, the basic structure of the changes seems clear and highly likely. Even before formal implementation, employers should consider these expected changes in any current salary planning, pension plan redesign or pension contract renewal (typically every five years for DC plans). Conceivably, the changes could mean future DB accruals are not possible for pension funds other than within the new ambition plans.

Accrual rate changes required by the agreement significantly affect nearly all Dutch DB and DC plans.

A steering group, consisting of cabinet and social partner representatives and advised by many pension funds, will now have to translate the agreement into concrete measures. A framework for compensation plans is expected to be published later this year. Every company will, in agreement with workers’ representatives, have to set their own compensation plan, and it’s expected that companies will generally also have to revise their overall salary structure as a consequence of the changes. The government’s objective is for implementation details to be available in 2020, followed by draft legislation in 2021 and formal implementation in 2022.

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Willem Eikelboom, Apeldoorn

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