Effective July 1, 2023, the Dutch pension system is undergoing significant changes with the implementation of the new Dutch Pension Act. This reform, adopted by the Dutch Senate on May 30, 2023, will have an impact on all employers with existing pension schemes. As a result, pension arrangements with employees and contracts with pension providers will need to be renewed. In this article, we will provide an overview of the key reforms to the Dutch pension system and outline the recommended steps forward. For those who are unfamiliar with the current Dutch pension system, a brief explanation will follow.
The Dutch pension system currently consists of three pillars that collectively determine the amount of pension an individual will receive after retirement:
- State pension (AOW): This pension benefit is paid to individuals upon reaching the current retirement age of 67. It is funded by contributions from younger people and operates on a “pay-as-you-go” system.
- Supplementary collective pension: This type of pension is arranged through employment and is commonly administered by pension funds. These funds are typically industry-specific and often mandatory, either for companies or groups of individuals working in specific sectors. Alternatively, pension schemes may be administered by insurance companies. The funding for these schemes comes from capital funding, with pensions financed by contributions made in the past and the investment returns on those contributions.
- Private individual pension products: These pensions are arranged by individuals on their own.
Currently, the Dutch Pension Act allows for three types of pension schemes: defined benefit schemes (either final pay or career average schemes), defined capital schemes, and defined contribution schemes. However, the defined benefit schemes are being phased out, and defined capital schemes are becoming rare. Defined contribution schemes, either in full or combined with characteristics of other schemes, are becoming more prevalent for employees, although the current generation of retirees mostly still have defined benefit schemes.
What’s the purpose?
The purpose of the pension reform is to revitalize the pension system in light of challenges such as low interest rates and an aging Dutch population. These factors have put pressure on the system, leading to higher costs and reduced pension benefits. The rise in self-employment and flexible labor arrangements has also affected the Dutch pension market, with fewer people participating in pension plans.
The new system aims to facilitate pension accrual as part of an individual pension capital while incorporating the advantages of collective risk-sharing. Defined benefits will no longer be possible, and the Dutch government intends to eliminate the system of average premiums where the same premium is paid for each individual, regardless of age. Instead, they aim to introduce a premium tailored to individual circumstances, allocated to the individual’s pension capital. This is a crucial element of the new pension system.
What are its’ main elements?
The main elements of the new Dutch pension system, from an employer’s perspective, can be summarized as follows:
- Contribution-based: Pension accrual will now be based solely on a defined contribution scheme, with pension assets managed and invested collectively for all participants. Agreements on defined benefit pension schemes will no longer be permitted, making the new system contribution-based.
- Three new types of schemes: The Act introduces three new types of defined contribution schemes: solidarity contribution schemes, flexible contribution schemes, and contribution-capital schemes (exclusive to pension insurers). The main difference between these options lies in the level of participant involvement in investment decisions and collective risk-sharing, using reserves in the event of subpar investment returns.
- Flat-rate contributions: Age-dependent pension contributions, commonly found in defined benefit schemes, will no longer be allowed. Instead, the current average pension accrual will be transformed into degressive pension accrual by adopting flat-rate pension contributions. Exceptions will apply to net pension and voluntary top-up contributions. Existing defined contribution schemes may also require amendments, with exceptions for schemes in place by June.
- Transition from defined benefit schemes: Existing defined benefit schemes will need to transition to the new pension system. Employers should prepare a transition plan that considers the conversion of accrued pensions into the new scheme (invaren) and provides adequate compensation to employees if the change is to their detriment.
- 30% tax limitation: The tax limitation will no longer be on pension accruals but on the contributions. The proposed maximum contribution for retirement and partner’s pension is 30% of the pensionable base.
- Net pensions: Net pensions (pension accruable on salary above €128,810 as of January 1, 2023) can be put into private individual pension products. The tax limitation of 30% will also apply to net pensions but with a net factor correction. Flat-rate pension contributions do not apply to net pensions.
- Partner pension: Partner pensions, paid out upon death after retirement, will be aligned with current market practice. Up to a maximum of 70% of retirement benefits can be converted into a partner pension. Partner pensions paid out upon death before retirement will be risk-based only, with a maximum of 50% of the pensionable salary, regardless of years of service, until three months after the participation in the scheme would have ended. The definition of a partner will be made uniform to account for changing societal norms.
These are the key elements of the new Dutch Pension Act that came into effect on July 1, 2023.
Source: Dentons.com, Johanne Boelhouwer, 22. July 2023