Change of the pension scheme, be aware for unconditional indexation
On 3 November 2020, the Amsterdam Court of Appeal held that an unconditional indexation scheme cannot be amended without the consent of the participants. Such an amendment would be contrary to the statutory prohibition to amend of Section 20 of the Pensions Act (PW). Employers who soon want to change their (expensive) pension schemes should be aware of the process and the (im)possibilities, especially when it comes to the modification of an unconditional supplement scheme.
Amendment of the pension scheme
In the case of the Amsterdam Court of Appeal, the employer wanted to amend the group pension scheme due to acute financing problems and the uncontrollability of costs. The employer wanted to switch from a defined benefit pension scheme based on career-average pay (middelloonregeling) to a CDC pension scheme. First of all, the employer submitted the proposed decision to the works council for approval pursuant to Section 27 paragraph 1 of the Works Councils Act. Part of the amendment concerned the replacement of the unconditional indexation for active participants (the employees) into conditional indexation. The works council has agreed to the proposed amendments.
Essentially, the employees must also agree to such a change in the pension scheme. Those agreements shall also include the amendment in the unconditional indexation for the employees. Based on established case law, the employees will have to give their deliberate consent before the employer can legally implement the amendments to the pension scheme. In certain cases, the employer may also amend the pension scheme unilaterally, i.e. without the consent of the employees. This is only possible if the employment agreement (or the employee handbook which is incorporated in the employment agreement) contains a unilateral amendment clause as referred to in Section 7:613 of the Dutch Civil Code and/or Section 19 of the PW, and the employer has a demonstrable and substantial interest in unilaterally amending the pension scheme in relation to the employees.
In the judgment of the Amsterdam Court of Appeal, the employer unilaterally amended the pension scheme, including the unconditional indexation for active members. A group of participants (in the pension scheme) did not agree with this. The Subdistrict Court initially rejected their claim. According to the Amsterdam Court of Appeal, the employer had sufficient reasons to unilaterally amend the pension agreement with its employees. However, he had no sufficient reasons for that part of the amendment which concerns the amendment of the unconditional indexation into a conditional indexation. The unconditional indexation on accrued rights of active members should have been maintained.
It is not possible to amend the unconditional indexation of accrued pension entitlements
Section 20 PW states that in the event of an amendment to a pension agreement, the pension entitlements accrued up to the time of the amendment shall not be amended, except in cases involving a group transfer payment or a cutback of accrued rights by a pension fund. Pursuant to Section 1 PW, the 'pension entitlement' is the right to a pension that has not commenced, except for agreed conditional indexation. The Court of Appeal concludes that the indexation included in the pension scheme is not a conditional indexation, but an unconditional indexation and that there is neither a group transfer payment nor a cutback. The Amsterdam Court of Appeal holds that the amendment to the pension agreement, as regards the abolition of the unconditional indexation of pension entitlements accrued up to 1 January 2016, is null and void. After all, the employees did not agree to this amendment and in addition a unilateral amendment of the unconditional indexation is not possible.
After the Court Noord-Holland in 2019, The Hague Court of Appeal at the beginning of this year and The Hague Court in August 2020, now the Amsterdam Court of Appeal also concludes that an unconditional indexation in a pension scheme forms part of the pension entitlement as referred to in Section 1 PW, and that the amendment from an unconditional indexation into a conditional indexation contravenes the prohibition to amend already accrued pension entitlements. This decision is in line with the (established) case law and therefore provides consistency. Section 20 PW prohibits the modification of the accrued pension entitlements, except in the case of a group transfer payment. This means that the amendment of the unconditional indexation as part of the pension scheme is not possible, not even unilaterally if the employer has a substantial interest in amending the pension scheme.
These judgments are very relevant for employers who are about to amend their expensive pension schemes which still includes an unconditional indexation. In this case, the nature of the indexation scheme was apparently not in question. Existing case law shows that an indexation scheme for active participants is unconditional and cannot be amended without the consent of the individual employees. However, in literature the opinions are divided. We believe that an indexation scheme in which the pension is increased during the employment, does not fall within the statutory prohibition to amend of Section 20 PW, and should therefore be amendable. Sufficient reference points for this conclusion can be found in the legislative history and in the financing methods of indexation schemes, as laid down in the Pension Act. Nevertheless, the existing case law is strict and also qualifies an indexation scheme for active employees (i.e. indexation in the course of the employment) as unconditional. This means that an indexation scheme cannot be amended as far as it concerns the already accrued pension entitlements, except in the case of a group transfer payment or a cutback by a pension fund.