Latest update: The Dutch Senate has passed the WTP pension reform with effect from 1 July 2023. A one-year extension to the original date by which employers must comply has also been approved; employers now have until 1 January 2028 to implement the required changes.
Background
Retirement benefits are provided through state pension insurance (AOW) and administered by the Social Insurance Bank. The state pension is a pay-as-you-go system, and retirement benefits are paid to pensioners at retirement age, which is linked to life expectancy. The AOW retirement age will increase to age 67 in 2024 and will further increase to age 67 and 3 months in 2028.
An industry-wide or employer-sponsored occupational pension scheme covers approximately 90% of employees in the Netherlands. Such schemes are typically administered through pension funds, as well as by pension insurers and premium pension institutions (in Dutch: Premie pensioeninstellingen – PPI). Currently, the Dutch Pension Act allows occupational pension schemes to be provided on a DB or DC basis. If the Senate approves the new bill, as is expected, DB accruals will no longer be permissible from 1 January 2028.
Key details
The WTP introduces the following changes:
DC pension schemes
If the bill passes the Senate, all occupational pension accruals will be contribution-based—final pay and career average DB accruals will no longer be permitted. Three types of DC pension schemes will be allowed: the solidarity contribution scheme, the flexible contribution scheme, and the contribution-capital scheme.
The solidarity contribution scheme will have a single collective investment policy covering, at a minimum, excess returns for active, former, and future scheme members. Financial gain and loss distribution are made in accordance with a predefined allocation rule by the pension fund. In a nutshell, the allocation rules aim at an age-related allocation of excess returns, which leads to a decrease in volatility and risk as members age. Pension accruals are based on collective risk-sharing between employees. A solidarity reserve is required.
The investment policy for the flexible DC scheme is based on a mix of investments that varies by age cohort (e.g., individual life cycle). Some pension schemes, depending on their design, may allow scheme members to choose their investment portfolio. The pension accrual phase and the benefit payment phase are separate. The accrued capital may be converted, upon retirement, into either a fixed or variable lifetime pension benefit.
The contribution-capital scheme is only available through pension insurers and may not be administered by pension funds or PPIs. Participants can use the accrued capital to purchase guaranteed fixed or partially fixed lifetime pension benefits as early as 15 years before retirement, transferring a portion of the risk to the pension insurer. Fixed or partially fixed pension benefits may not be paid until retirement.
In all schemes, members may choose to take up to a maximum of 10% of the total value of the accrued old age pension as a lump sum payment at retirement age.
Age-independent contributions
If the Senate approves the WTP, a flat-rate DC contribution independent of age will need to be implemented in all new pension schemes as of 1 July 2023. Participants of new schemes will be contributing toward their DC pension scheme at the same rate regardless of their age.
Current pension schemes will need to be updated accordingly by the end of the transition period on 1 January 2028, except for the following instances, subject to specific conditions included in the WTP:
- Voluntary DC schemes,
- DC schemes that are already based on a flat-rate contribution, or
- DC schemes existing on 30 June 2023 with an age-related contribution scale that are effectively closed to new employees hired on or after 1 January 2027. (While age-related DC schemes existing before 30 June 2023 and flat rate DC schemes may coexist from 1 January 2028, multiple schemes may not be an optimal solution for many companies).
Tax limitations
Tax limitations will apply to contributions rather than pension accruals. The contribution rate will be capped at 30% of pensionable earnings (pensionable salary to a ceiling of EUR 128,810 in 2023) less a social security offset (a minimum offset of EUR 16,322 applies in 2023).
The contribution limits are structured within a fiscal framework intended to keep pension provision within 75% to 80% of career average pay with 40 to 42 years of participation. After the new WTP-proof scheme is implemented, the maximum contribution rate cap can be increased by 3% to 33% until 1 January 2037 to compensate for any loss in accrual due to the transition. The maximum of 30% (or 33%) can be adjusted according to a table included in the legislation if the expected returns (expected interest rate as determined by the Dutch Central Bank and Ministry of Finance) change. Such changes will be notified in advance by the Dutch Central Bank.
Transition period
Employers should draft a transition plan in consultation with the Unions. If no unions are involved, employers must submit the transition plan to the works council (if any) as part of the consent request for the change of the pension scheme. If there is no works council, the employer must inform the employee representatives about the intended change. As a rule, all individual employees must consent to the change of the pension scheme as laid down in the transition plan, if no Unions are involved. The transition plan must be submitted to the pension provider no later than 1 January 2025 in the case of a pension fund. Submission of the transition plan to a pension insurer or PPI should be made no later than 1 October 2026 or sooner to align with the scheme contract period.
Since older participants may be disadvantaged by the lower accruals under the age-independent scheme, suitable compensation for such participants may be required. If such compensation measures are agreed upon, these must be reflected in the transition plan, including the required funding. If the transition from the old to the new scheme does not generate sufficient funding for compensation, employers may pay an additional premium for certain age groups.
Employers who do not transfer to the new scheme before the end of the transition period risk facing several consequences, including the taxation of the full accrued pension plus a 20% interest penalty.
Survivors’ pensions
The definition of a partner will be standardized and will include registered or cohabiting partners. Partner pensions paid at death after retirement will be limited to a maximum of 70% of the primary member’s retirement benefits. Partner pensions paid at death before retirement will be on a risk basis and limited to a maximum of 50% of the pensionable salary without regard to the participation years.
Orphans’ pensions paid at death before retirement cannot exceed a maximum of 20% of the pensionable salary – a maximum of 40% for full orphans – with payment to age 25 (currently up to 14% of the pensionable salary – up to 28% for full orphans – with payment until the age as agreed in the scheme, but ultimately until the age of 30
Eligibility age for scheme participation
In December 2022, an amendment was added to the WTP, lowering the age at which employees must be eligible for pension scheme participation from age 21 to 18. From 1 January 2024, all Dutch pension schemes must comply with this.
Next steps
A final version of the legislation is expected in due course. If they have not already done so, employers with pension schemes in the Netherlands should consult with their Lockton Global People Solutions consultants, relevant stakeholders, and their pension advisor to better understand the new legislation and its impacts on their business. We expect that the overall transition will be time-intensive and extensive; as stated previously, employers who do not comply could face penalties.
Our partner, Vanbreda Netherlands has a team of experienced pension consultants ready to assist. Employers may also find value in strategic legal advice to prevent or manage potential stakeholder disputes.
Pension Draft Bill (Wet toekomst pensioenen)
https://www.eerstekamer.nl/wetsvoorstel/36067_wet_toekomst_pensioenen
In collaboration with:
Attorney, Pensions Law
Blom Veugelers Zuiderman
Employee Benefits & Pension Consultant
Vanbreda Risk & Benefits
Senior Employee Benefits Consultant
Vanbreda Risk & Benefits
Pension Draft Bill (Wet toekomst pensioenen)