A] Prelude
Due to new Dutch mandatory pension law called ‘Wet Toekomst Pensioenen’ (WTP), the Dutch system of (Mandatory) Occupational Pensions will change in a major way.
As of now about 80% of the Dutch Occupational Pension Plans, among which the huge mandatory Dutch Pension Funds, had a Defined Benefit (DB) nature. Which meant that i.e. each participant would have a guaranteed increase of his pension claim as of retirement age for each year he participated additionally. Which guaranteed claim could be increased by (un)conditional annual indexation but could also decrease in case of a substantial lack of funding.
Due to the historically low interest rates combined with increasing longevity, which often led to a lack of funding and decreasing claims, this system did not provide a transparent pension claim. The ‘guaranteed’ claim appeared not to be that guaranteed in reality.
Therefore change was in order. Which change according to the mandatory law will have to be implemented before 2028.
We will now mention the most relevant changes due to the new system.
B] Switch From DB To DC
Whereas until now most large pension plans offered a Defined Benefit (DB) guaranteed pay-out as of retirement age, the new system will have a Defined Contribution (DC) investment nature.
Meaning that the amount of annually paid pension premium is the pension claim. Which premium will be invested until retirement age, when the total capital will be used to mandatorily buy a lifelong old age pension claim.
Thus the new system ends the guaranteed pay-out and ‘gives’ the participant the investment and interest risk. Very substantial new risks and thus a huge change.
The conclusion is that according to the mandatory WTP law, all existing DB Pension Plans will have to be replaced by DC Pension Plans.
C] Switch From Collective Pensions To Personal Pension Pot
Whereas in the old system there was a collective system of premium payment, investing and pay-out, the new system means i.e. that each participant will get a Personal Pension Pot in which his personal pension premium will be deposited and invested.
The WTP offers three different type of DC Pension Plans to choose from in the new system:
I. Solidarity Defined Contribution Plan
In this plan a collective investment policy is (still) pursued for participants. The achieved financial results are then allocated individually on the basis of predetermined allocation rules per age cohort.
A Solidarity Reserve is also created. The pension administrator can use this reserve to spread risks over different generations.
II. Flexible Defined Contribution Plan
In this plan an individual investment policy is pursued. Meaning investment mixes per age cohort. This is i.e. based on the risk attitude per age cohort. Thus financial results are i.e. for the individual participants.
However, by means of a ‘Risk Sharing Reserve’, certain risks can be shared collectively. Maintaining such a reserve is mandatory for Mandatory (Branch) Pension Funds.
III. Standard Defined Contribution Plan
Oversight
This version is also available in the current pension system and is thus an already existing plan. The plan can only be executed by an insurer or PPI.
This plan offers the option, starting 15 years before the retirement date, to use the pension capital accrued up to that point for a (partial) guaranteed Defined Benefit old age pension. When switching the pension capital into such a fixed guaranteed pension claim, the investment and interest rate risks are taken over by the insurer/PPI.
(Of course one can question if it is best to make that switch at that moment. Or better to wait until retirement age and to then ask a number of insurers for a quote in order to choose the insurance company that offers the highest life long guaranteed pay-out.)
Pension Premium
Until now it was allowed and rather usual that the old age pension premium was related to the age of the participants.
In order to provide an equal pension claim for each participant of a plan, the premium tended to substantially increase with age as older participants have a shorter investment horizon and thus needed to get a higher pension premium in order to have the same end result as younger participants who have a longer investment horizon.
The new regime ends the option to have such a with age increasing old age pension premium and introduces the mandatory flat pension premium which is equal regardless of the age of the participant.
The introduction of this flat old age pension premium with an annual max amount of 33% of the pension base does not mean that the related tax benefits are expected to be less than in the old system. The WTP aims to provide equal tax benefits as before.
D] Conversion Existing Pension Claims
The WTP stipulates that Employers/Labor Unions/Pension Funds together should draft a ‘Transition Plan’. This plan provides the basis for the transition of the old and existing pension plan and claims into a new DC Pension Plan.
(If there are no unions or pension funds involved in a certain situation and there is only an employer with an occupational pension plan, then the WTP states that the employer is obliged to draft such a Transition Plan.)
This plan mentions which version of the DC Plan has been chosen and explains how to convert already existing (DB/DC) pension claims into the new DC Pension Plan. Which is one of the most or probably the most sensitive aspect of this entire change in system.
The WTP requires that the transition and conversion have to be ‘balanced’. Which is still an undefined standard. The Employers/Labor Unions/Pension Funds involved will most likely each interpret this norm differently.
Negative and positive transition effects are acceptable as long as the parties involved are able to properly justify the choices they have made.
Finally when Employers/Labor Unions/Pension Funds agree to the decision about the conversion, the Pension Fund will notify the Dutch Central Bank. As the Dutch supervisory authority, they will assess this notice. Which they will do according to the assessment criteria laid down by law.
E] Compensation Negative Impact Conversion
The switch due to WTP from a DB Plan to a flat rate age independent DC Plan can result in a decreasing pension claim. Especially for participants in the age cohort 40-55. Which raises the question of compensation of the negative impact.
The WTP clearly stipulates that such negative impact needs to be compensated in an ‘adequate and cost neutral manner’. The details of the proposed compensation need to be included in the Transition Plan.
There are three types of compensation allowed:
1] Compensation within the occupational pension plan is the preferred approach of the WTP. Which means that the compensation has to be within the related legal and tax regime limits.
2] As alternative the compensation could also be provided outside of the occupational pension regime and by means of additional wages. In that case the pension regime limitations do not apply.
3] Finally it is also possible to provide compensation partially within the pension sphere and partially within the wages sphere.
F] Next Of Kin Pension Claim
Please be aware that the until now mentioned system change from DB into DC is i.e. related to Old Age Pension Claims.
Regarding Next Of Kin Pension Claims like Partner/Orphan Pension it is relevant that their coverage before retirement age is still based on guaranteed pensions on (only) risk base.
The WTP also does not lead to a lower amount of coverage of these type of claims. Quite the contrary as their max amount is not any longer related to the max future employment period but i.e. max 50% of the current annual wages independent of how long an employee will work for an employer.
G] Final Deadline
Due to WTP the entire transition process has to be completed before 2028.
H] Conclusion
Expats who have existing Dutch DB Occupational Pension Claims will most likely face this transition into a DC claim.
Due to the much more personal nature of investments and risks within the new regime, it is advisable to carefully look into this new personal pension situation and check if this is according to your wishes.
Maybe you would like to transfer the value of the existing Dutch claim before the switch to a DC claim to your new active occupational pension plan in another country.
Feel free to contact us with any questions you might have!