The Dutch government has reached an agreement on pension reform with the two most important unions in the Netherlands: FNV and CNV. The pension reform aims to change the structure of pension accrual in industry-wide pension funds.
For several years, the Dutch government has been trying to develop a new framework for supplemental employer-provided pension plans to provide equal premium regardless of age. Under the new system, the premium paid is for individual pension accrual (no generation solidarity component). In June 2019, the government reached an agreement with employers and unions on the new pension age and pension structure.
The government has made the following commitments on the social security age:
- The state pension (AOW) age will be frozen at age 66 and four months for 2020 and 2021 and will then rise in stages to age 67 by 2024. After that, the state retirement age will be linked to life expectancy (one year of increase in life expectancy results in an eight-month rise in AOW age).
- The fiscal sanctions on early retirement will be canceled. Employers and employees are permitted to make additional agreements in CLA’s to retire up to three years early, defer receipt of their social security pension to the normal retirement age, and receive an employer-paid benefit of up to EUR 19,000 per year in the interim.
The following provisions are included in the employer-sponsored supplemental pension plan framework:
- The value of the annual pension accrual will not be allowed to vary based on the member’s age. This applies to all types of plans.
- Defined contribution plan – Currently, the value of the annual accrual (i.e., the contribution rate) increases with age. Under the new framework, this would no longer be allowed.
- Defined benefit plan – The pension rate is typically independent of age, which means that the value of the pension accrual increases with age. This would no longer be permitted.
- As a result, there will be flat contribution rates in DC and DB plans.
- Current employees must be compensated separately by their employers for any decrease in their pension accrual values. This will increase employer costs, estimated at two- to three- times the current annual pension contribution.
- A new type of “ambition” pension plan design option will be introduced for non-insured arrangements. The new design will not offer benefit guarantees nor require funding buffers.
- Ambition plans will increase pension benefits immediately if the year-end funding coverage ratio is above 100%, which is lower than the current 110% threshold. However, benefits will also now be reduced immediately if the funding coverage ratio falls below 100%.
- For current insured pension plans, the following transitional measure is agreed:
- To continue the current DC plan (age-related DC premium) for the current population of employees; and
- To set up a new flat rate DC plan under the new legislation for new employees.
The Dutch government expects the implementation details to be finalized in 2020, followed by draft legislation in 2021 and formal implementation in 2022, with a transition period from 2022 to 2026.
The changes included in the pension reform will have a significant impact on nearly all Dutch DB and DC plans, resulting in additional employer costs. Employers should consider these changes in any current salary planning, pension plan redesign or pension contract renewal. Employers should monitor future legislation finalizing the requirements and implementation timeframes.