Changes and immediate opportunities surrounding statutory retirement age

Multinationals in the Netherlands with defined benefit pension plans and their employees can avail of a delay in the currently scheduled increases in the statutory retirement age introduced by the pension reform.

While the Dutch government will likely only sign its revolutionary reform of the pension system into law at the end of next year, a few related laws are being modified in support of the reform.

One of the outcomes is that the statutory retirement age was frozen for 2020 and 2021 at age 66 and 4 months and will only gradually increase to 67 in 2024. Under prior rules, the statutory retirement age would have risen to age 67 in 2021. This measure was a key concession the government made in order to reach an overall agreement with the unions in June 2019. It was passed into law in December 2020.

In January 2021, the parliament also approved a temporary waiver of the early retirement program penalty effective immediately. Employers have been discouraged by government from establishing early retirement programs such as early pension “bridges” to normal retirement, through the application of a 52% levy on the value of the pension subsidies.

The waiver of this levy applies to the pension subsidy amount up to a cap, which is then taxed in a manner congruent to the state pension. Above that cap, the levy will continue to be applied. The waiver applies to early retirement at most 3 years from the normal retirement age and expires at the end of 2025.

The temporary measure is intended to soften the impact of increases in the normal retirement age that have been made in the last few years, thereby enabling some employees to retire with a shorter delay than that required by the gradual increases previously implemented in the statutory retirement age.

This presents employers with an opportunity to allow older employees to retire under the existing pension regime in their companies avoiding a conversion to a DC arrangement once the new reform law is in place.

For more details on the Dutch reform and its consequences, please contact miguel.santos@altaactuaries.com to receive a copy of the full report.

A unique opportunity to transform pension strategy in the Netherlands

In our previous blog post, we discussed how the announced Dutch pension reform would eliminate Defined Benefit pension arrangements in that country. The reform opens up a number of opportunities for employers that maintain defined benefit programs in the Netherlands.

While defined contribution plans have existed in the Netherlands for some time, the legally permitted plan design has been hardly attractive to younger workers and quite costly for older workers. The anticipated reform would open up opportunities to more conventional defined contribution plan designs of the type favored by multinational employers.

The fundamental provision of the anticipated pension reform, which is now expected to become effective as of January 1, 2023 at the latest, is the replacement of traditional Defined Benefit (DB) arrangements by a Defined Contribution (DC) system. This will result in the elimination of pension liabilities from the company’s balance sheet and all solvency and funding requirements that go along with Defined Benefit plans.

Defined Contribution plans will be expected to finally allow the adoption of a uniform flat rate contribution structure for all employees regardless of age, which is currently not permitted. With such a simplified structure, employers will be able to design pension contributions that are far more attractive to younger workers, promote visibility of pension benefit accruals, and deploy simple communication strategies with a uniform contribution formula that applies to all workers regardless of age.

The existing type of DC plan design with variable contribution rates graded upwards by age has been a thorny issue with the younger workforce who receive considerably smaller pension contributions relative to older workers, as well as being more difficult to communicate and administer.

Other features of the anticipated reform that will provide employers and employees with additional tools to formulate more effective retirement benefit programs are:

• Higher tax deductibility limits for contributions

• Obligation to offer life-cycle investment options in all plans thereby allowing automatic reallocation of investments in individual accounts to reflect the changing investment risk profiles of employees as they age

• More participant choice in the form of benefit payment

• Formal framework for Defined Contribution plans funded collectively in a pension fund to increase investment leverage and administrative and cost efficiency

• Easier integration of pension benefits within the employer’s total rewards strategy

Although opportunities are many, these will not come without a number of challenges that need considerable effort to overcome. The younger generation is the main target of the pension reform, but adverse impact on the older workforce cannot be overlooked – assumption of investment risk in their retirement nest eggs, potential curtailment of retirement benefit levels and loss of early retirement subsidies in existing DB plans, are but some of the danger areas involved.

In order to ensure an orderly and successful transition, employers must plan design proposals as early as possible and adopt appropriate mitigation measures such as employee consultation, grandfathering clauses (to protect not only existing benefit accruals but retirement benefit expectations), and conduct intensive financial education and communication campaigns.

In principle there will be a 4-year transition period upon formal adoption of the reform. Some provisions are set to go into effect immediately. In a Dutch context, this timetable is quite tight and the repercussions of insufficient planning or rushed implementation can have devastating consequences well beyond pensions.

Companies should review the potential financial and HR impacts of the anticipated reform on their existing pension programs, formulate objectives, strategize on their options and plan for desired solutions in a well-organized, transparent, and consensual manner, in the Dutch style, in order to ensure a successful, cost-effective and timely transition.

Later this week we discuss the opportunities for employers and employees to facilitate retirement below the statutory retirement ages prescribed by current law.

For more details on the Dutch reform and its consequences, please contact miguel.santos@altaactuaries.com to receive a copy of the full report.

Defined benefit pension model at its death knell in the Netherlands

The long-announced pension reform in the Netherlands that will result in all Defined Benefit (DB) pension programs being terminated and converted into Defined Contribution (DC) arrangements has been granted a one year stay of execution. The reform is now expected to be enacted with effect from January 1, 2023.

Although eliminating long term pension liabilities is generally welcomed by employers, the reasons in the Netherlands reflect wider acceptance by the social partners (government, employers and employee representatives) that the global employment landscape is permanently changing, even in the Netherlands. The days of a “job for life” are gone. The new generation of professionals is much more mobile and independent, which is feeding the new “gig” economy. Indeed, one of the concerns of the Dutch government is that many young professionals are working as freelancers or independent contractors, and missing out on occupational pension benefits.

This reform is not taking place hastily. The Dutch social partners have been discussing this reform for more than a decade. The government announcement last month that the implementation of the proposed law would be postponed by up to a year only highlights the practical difficulties involved. The current conditions in the Netherlands – a weak economic environment as employers struggle with the Covid-19 pandemic, historically low interest rates, and fears of a potential stock market correction - are not supportive of the enormous transformation anticipated by the reform. Further delays would not be a surprise, but they would be due to tactical rather than structural considerations.

From a global perspective, the Dutch pension reform is a strong confirmation of the continuing demise of defined benefit plans in countries around the world.

The Netherlands can be considered as one of the last bastions of the Defined Benefit pension model for occupational plans. The vast majority of pension programs in existence in the private sector in the Netherlands are DB arrangements despite a recent trend for new plans to take on a DC format. The Dutch DC plan designs have been obliged to follow an age-related contribution scale to mirror that of a DB plan that starts off with low contribution rates. A traditional DC plan with contributions set as a fixed percentage of pay, such as the one that would be prescribed by the anticipated reform, would build up more pension benefits initially and therefore be better suited for employees with frequent movement from employer to employer.

To put the magnitude of this initiative into a local context, consider that Dutch pension funds hold over US$ 2 trillion in assets equivalent to over twice the country’s GDP, the highest ratio in the world. Only the US and the UK hold more pension fund assets in absolute value, but both countries with significantly larger populations.

Furthermore, the pension system in the Netherlands has maintained the top ranking in the world in the Mercer CFA Institute Global Pension Index[1]. This index is a benchmark of retirement pension systems in a number of countries around the world, with adequacy of retirement income and sustainability of the system amongst the key factors studied.

So why would a country considered as maintaining the best pension system in the world and having resisted moving away from DB pensions for many years now elect such a radical move to fully convert its programs in a short space of time? The unequivocal answer is the gravitational force of the global transformation of the relationship between workers and their employers away from lifetime employment.

Other countries such as the UK and Germany have recently introduced legislation favoring the DC pension model in a bid to make these more attractive. But none send out a message as strong as the Dutch one in terms of where the world of pension benefits is heading.

Next week we offer insights on how the reform will enable multinational employers with Dutch DB pension liabilities to permanently remove them from the books.

For more details on the Dutch reform and its consequences, please contact miguel.santos@altaactuaries.com to receive a copy of the full report.

[1] Formerly Melbourne Mercer Global Pension Index