Pension law - Update Q1 2019
Legislation - Pension system reform is further away.
The negotiations on the reform of the Dutch pension system between trade unions, employers and other members of the SER, which failed in November last year, have still not resumed. The target date of 2020 for a new pension system will be hard to meet. What are the consequences of this and what will happen next?
The result of this is simply that the problem faced by many pension funds, the inability to index pensions and the obligation to reduce pensions from 2020 onwards, remains topical. It is highly probable that 60% of pension funds will have to reduce the pensions. In addition, the state pension age continues to rise and the problem of self-employed workers who do not participate has not been solved. A solid pension system cannot be achieved without members, so the participation of flexible workers such as the self-employed is vital. From a professional point of view, it is not hard to understand why negotiations have failed. This is because no solution has been found to what is perhaps the most important bottleneck in the current system, namely the principle cast in stone that pension liabilities must be valued at the risk-free (very low) interest rate, with high buffers being maintained in order to be able to index. On this point, no compromise was possible, which is surprising because the pension guarantees would have been reduced.
A committee has now been set up, led by the former Minister of Finance, Jeroen Dijsselbloem, to advise on the notional interest rate to be used for long-term pension liabilities. For the time being, this notional interest rate is less favourable than the notional interest rate that insurers must use. Alignment of the rules may have a positive impact on the coverage ratio, which may prevent discounts from being applied. In a government letter dated 1 February 2019, Minister Koolmees also announced that he would 'get started' with a number of steps towards the necessary reform of the pension system, such as, in particular, abolishing the flat-rate premium, adjusting investment rules according to age and the introduction of pension contracts with personal pension assets. The question is whether this will lead to a reopening of negotiations between the parties, especially as it seems that the trade unions are against the last two steps in particular. It is unlikely that the reform will take place without a pension agreement. To be continued.
Pension fund practice - Financial assessment framework hampers increasing need to switch to alternative investments
Investment specialists point out that the current financial assessment framework is increasingly impeding the investment freedom of pension funds. As long as the coverage ratios remain low, the risk profile of the investment policy may not simply increase (without increasing buffers). This hinders the possible future phase-out of poorly performing government bond portfolios for alternative solid investments in infrastructure, rented housing, mortgages and the environment. Discussions may intensify because the legal rules on freedom of investment versus solvency rules conflict. You can read our article of October 2018 in Tijdschrift voor pensioenvraagstukken: Verbod vergroting risicoprofiel, absoluut? (available in Dutch only).
Pension case law - amendment of pension scheme and information and consent requirement
On 4 December 2018, the Court of Appeal of The Hague ruled in a pension dispute that the (unfavourable) amendment of the pension scheme is only legally valid if the employee has been provided with clarity about the content of the amendment(s) and deliberate and unambiguous consent to the amendment(s) may be assumed on the basis of statements or conduct of the employee. Once again, this judgment shows that amendment processes are legally 'challenging' and have become increasingly a subject of dispute. It is not only the case that written consent is only fully effective if the employee is also fully informed; according to the Court of Appeal, consent must also be unambiguously given. It is striking because the employee in question was a pension expert himself. It is also striking because the highest court in the Netherlands, the Supreme Court, did not set a precedent in its judgments for applying this serious judicial review of lawfulness. For employers in the district of The Hague, however, this decision should not be underestimated.
Should you have any questions regarding this update, please contact your trusted adviser of our Employment & Benefits team of Loyens & Loeff.