Future Pensions Act passed by Senate, now what?

As a result of the Future Pensions Act, every employer has to think about the future pension agreement with its employees. The transition to a premium agreement with an age-independent contribution means that all pension schemes will have to be changed in the coming period. The first deadline is as early as 1 July 2023, when the Act enters into force.

The main reason for the change is to make our Dutch pension system more future-proof. Because of the financial security we try to pursue, we have to maintain high buffers in the current system. This has led – partly due to the low interest rates in recent years – to the fact that since 2008 pensions have not or hardly been adjusted for inflation. We are also getting older, there are fewer people in work compared to the number of pensioners and we often no longer work for one employer all our lives.

Future Pensions Act: key changes

As a result of the Future Pensions Act, every employer has to start thinking about the future pension agreement with its employees. Below, we outline the four most important changes.

New pension contracts: from benefit schemes to contribution schemes

Defined Benefit schemes (‘DB’) will be replaced by Defined Contribution schemes (‘DC’), in which everyone will have their own pension assets. In the new system, there will be two types of contribution schemes:

• the solidarity premium scheme; and
• the flexible premium scheme.

The solidarity premium and flexible premium schemes have many similarities, but there are also differences. In both schemes, the contribution will be the commitment and pension accrual takes place in terms of personal assets instead of entitlements to an annual benefit. Survivor's pension and disability insurance can also be agreed in the same way. 

Differences between the two schemes are mainly in the allocation of investment returns. In the flexible scheme, the allocation of investment returns takes place via individual allocation or via a collective allocation mechanism. In practice, this means that a specific investment mix is maintained for each participant within an age cohort (e.g. 45 to 50 years). In the solidarity premium scheme, a collective investment mix is maintained for the total fund base. Allocation of investment returns to the different age cohorts takes place on the basis of predefined allocation rules. In addition, members in the flexible premium scheme can, for instance, choose between a fixed or a variable benefit on retirement date, whereas in the solidarity premium scheme, in principle, only variable benefits are possible.

Age-independent contribution and compensation

The current pension system has an age-dependent pension contribution. In benefit schemes as well as most defined contribution schemes, the cost of pension accrual is age-dependent: pension purchase is more expensive the older an employee is, despite the fact that in many cases the same percentage of pension contribution is paid for all members.

Under the new system, an age-independent pension contribution will become mandatory. This means that an equal premium percentage will soon have to be paid for everyone, regardless of age. The maximum contribution percentage will soon be 30 per cent of the pension base, excluding costs and risk premiums (for disability, for instance). This change affects both older and younger workers: for a young person, more contributions will be made, while an older person will receive less contributions under the new scheme than under the old one.

The costs of the transition to the new pension system can be substantial for employers, partly due to the mandatory 'adequate' compensation for employees. Employers or social partners with a pension scheme with a pension fund can use existing pension assets to partially or fully absorb the negative effects of the changes. Employers with a pension scheme with a premium pension institution (‘PPI’) or insurer do not have this option. They have to compensate for the negative consequences of the transition for the employee themselves. This compensation is expected to lead to a (temporary) increase in the employer's required pension budget. 

For defined contribution schemes and insured defined benefit schemes existing on 30 June 2023, three solutions basically apply:

• Transitional law: continue the current age-dependent scheme for employees who joined before 1 January 2028 and start a new age-independent contribution scheme for new employees from 1 January 2028. It is worth noting that until 31 December 2027, it is still possible to set up an age-dependent scheme for employees who entered service before 1 January 2028. We assume that the promised extension of the transition deadline will lead to a one-year delay here too.
• Within the pension scheme: no later than 2028, switch to an age-indexed contribution rate and compensate employees for a possible decline within the pension scheme within 10 years (or a maximum of 9 years if this term is not extended by one year as was the case with the final transition date), with new employees also having to be compensated the same as their peers during that period. Please note: if you decide to transfer the pension entitlements to the new pension system earlier, the period for compensation may exceed 9 years.
• Outside the pension scheme: switch to an age-independent contribution by 2028 at the latest and compensate current employees outside the pension scheme under a 'total rewards' concept, e.g. through additional salary.

The first method leads to the smallest increase in costs, but also to two different pension schemes within one company, with all the consequences that entails.

Survivor's pension

As part of the Future Pensions Act, the survivor's pension also changes dramatically. Due to the system change, situations may arise that do not offer adequate coverage or where the coverage is actually higher than (socially) desired. 

The Future Pensions Act has no substantive changes regarding a partner's pension in case of death after the retirement date. The partner's pension in case of death before the retirement date does change. The main concerns of this are:

• Employers will soon be able - as a result of the Future Pensions Act - to insure the partner's pension before retirement date only on a risk basis. With a survivor's pension on a risk basis, surviving relatives are assured of a survivor's pension for as long as an employee participates in the pension scheme.
• The amount of the benefit is in principle a percentage of the salary or pension base (the tax maximum is 50 percent of the pensionable salary instead of 70 percent of the attainable retirement pension under the current system).
• In addition, the coverage of the survivor's pension becomes time-independent. As a result, the level of the partner's pension no longer depends on employment history or years of service (to be achieved) with the current employer. This ensures a better fit when changing jobs.

Transfer of values (‘invaren’)

Another important part of the system change is that, in principle, all accrued pension entitlements and rights at pension funds will be transferred  into a new pension scheme (in Dutch: 'invaren'). Unless this is disproportionately disadvantageous for groups of participants or if social partners do not want to transfer the pensions entitlements.

The effect of this transfer must be calculated and is part of the consultation with social partners. An important part of the transfer is checking the correctness of all data (personal data, pension entitlement levels and so on).

What should you do as an employer?

The impact of the Future Pensions Act will be significant and it is important for all employers to start preparing in time. As an employer with a pension scheme with a pension fund, insurer or PPI, what exactly do you all need to do?

Some pledges provide final amendments to the Future Pensions Act 

On 22, 23 and 30 May, Minister Schouten made a few more pledges in debates with the Senate.  For instance, several senators asked for more time for pension providers and implementing organisations and better monitoring of the transition. The minister's main commitments are:

• The transition deadline changes from 1 January 2027 to 1 January 2028. As a result, pension administrators will have one year longer to transition to the new pension system.
• There will be weighing moments in 2024 and 2025 to monitor how the transition is going. At these moments, it can be assessed whether it is necessary to further extend the transition deadline (1 January 2028).
• There will be a government pensions transition officer who will independently advise the minister if there are any bottlenecks anywhere during the transition.
• A number of motions were adopted that instruct the government to regulate a number of issues, such as a call for the continuation and widening of the RVU scheme, closing the pension gap and promoting longer working lives as well as the legal regulation of the voluntary continuation of the orphan's pension and the continuation of the partner's pension in the form of an exchange of elderly pensions as the standard.

Other concerns for employers

On 1 July 2023, the Act enters into force and employers have until 1 January 2025 to reach an agreement on the (adjusted) employment conditions. However, another important date to keep in mind is 1 January 2024; as of this date, provisions that may be relevant for you as an employer will already start to apply. For instance, from 1 January 2024, the statutory maximum starting age in the pension scheme will go down from 21 to 18. Furthermore, the waiting period will lapse and threshold periods (period during which a person does not yet accrue pension) will be allowed to last a maximum of 8 weeks. Furthermore, the external dispute resolution body (‘EGI’) will also start operating. This EGI will handle disputes relating to the implementation of a pension scheme (which are executed by a pension fund).