What will change? Imporant changes pursuant to the Wtp
The current pension system will fundamentally change under the new Pensions Act. That is because the introduction of the Wtp will eliminate the so-called defined benefit scheme that is currently in effect for 80% of Dutch people who accrue pension through their employer. This scheme was characterized (in short) by a certain fixed amount of pension benefits guaranteed to participants. Pursuant to the new Pensions Act, however, all defined benefit schemes must be replaced by a defined contribution scheme. The defined contribution scheme is characterized by a fixed pension premium that participants (and employers) pay, with which a personal pension capital is then accrued for the individual in question (in a 'personal pension depot’).
There are three variations of the defined contribution plan to choose from:
- The solidarity defined contribution scheme. Within this scheme, a collective investment policy is pursued for the participants. The achieved financial results are then allocated individually on the basis of predetermined allocation rules (per age cohort). A solidarity reserve is also formed, which the pension administrator can use to spread risks over different generations.
- The flexible defined contribution scheme. Within this scheme, an individual investment policy is pursued (investment mixes per age cohort), which (among other things) is based on the risk attitude of a certain age cohort. As a result, financial gains and losses are in principle for the account and risk of the individual participants. However, through a so-called risk-sharing reserve, certain risks can be shared collectively. Maintaining such a reserve is mandatory for mandatory (industry) pension funds.
- The defined contribution scheme. This variant is also known under the "current" pension system and is thus an existing scheme. The scheme can only be executed by an insurer (and under certain conditions by a pension contribution institution (PPI). Within this scheme, starting 15 years before the retirement date, it is possible to use the pension capital accrued up to that point for a (partial) defined benefit retirement pension. When purchasing a fixed pension benefit, the risks (interest rate investment and longevity risks) are taken over by the insurer.
What should stakeholders do?
The transformation of the Dutch pension system entails several legal obligations for employers.
The transition plan forms the basis for the transition to a new pension scheme in the form of the defined contribution scheme. The transition plan makes clear which defined contribution scheme will be chosen (see possible variants above) and elaborates on how to deal with the conversion of current pension entitlements to the new scheme (in Dutch this is called: ‘invaren’). It follows from the new Pensions Act that all employers in the Netherlands with a pension scheme in place are obliged to draft such a transition plan. In practice, this will be done in consultation with the pension administrator (pension funds).
There is an important exception to this main rule. When an employer participates in an industry-wide pension fund (Ipf), the transition plan is drafted by the social partners, i.e. the trade unions and employer representatives. This concerns about 80% of employers in the Netherlands. Incidentally, an employer does have to draft its own transition plan, that is if it has its own pension plan in addition to participation in an Ipf.
The transformation of the pension system requires the amendment of existing pension schemes. After all, these schemes are based on the old pension system. In principle, a change in pension schemes requires the right of consent of the Works Council under Section 27 of the Works Council Act (WCA). This (usually) does not apply to employers where the pension scheme is laid down in the collective bargaining agreement or if there is mandatory participation in an Ipf. The transition plan itself does not require separate consent of the Works Council.
The pension scheme in place qualifies as an employment condition. From this it follows that the amendment of a pension scheme in principle also requires the (explicit) consent of employees. This right is not replaced by the consent of the Works Council. Relevant in that context is whether a unilateral amendment clause has been agreed in the pension agreement (which may be part of the employment contract). If so, the employer will have to argue that it has a compelling reason for amending the pension scheme. If no unilateral amendment clause is included in the pension (or employment) agreement, the question is what an employer can reasonably expect from an employee under the principle of ‘being a good employee’ to do when amending the terms of employment.
The foregoing does not apply to employers who are mandatorily affiliated with an Ipf or for whom a collective bargaining agreement applies that stipulates a pension plan. In that case, the decision to amend the pension scheme has a direct effect on the pension agreement and/or employment contract.
Former employees and pension beneficiaries may also be affected by decisions in the transition plan, especially with regard to the conversion of their current pension entitlements to the new scheme (‘invaren’). As this group is not directly involved in the negotiations about the new pension scheme, the legislator has created a right to be heard. The new Pensions Act gives associations of former participants in the pension scheme and associations of pension beneficiaries the right to be heard and give their opinion on the transition plan. However, these views are not binding - so the social partners are not obliged to adopt any opinions.
After the employer has drafted the transition plan, the pension fund must decide whether it wants to implement and execute the new pension scheme and whether it will cooperate with the "conversion" (‘invaren’) under the set conditions. Important to note is that pension funds maintain their own responsibility under the new Pensions Act and will thus have to carefully consider whether they agree with the transition plan. To make the process efficient, in practice they will probably often be involved in the drafting of the transition plan at an early stage.
Nederlandsche Bank (the Dutch Central Bank)
If both the social partners and the pension fund agree to the decision about the conversion (‘invaren’), the pension fund notifies De Nederlandsche Bank (DNB) (the Dutch Central Bank). In its role as supervisory authority, DNB will assess this notice. DNB does this on the basis of the assessment criteria laid down by law. These include the financial impact, the decision-making process and the financial and other risks of the decision to convert the current pension entitlements to the new pensions scheme (‘invaren’). For example, the financial effects must have been properly identified, the pension fund board must have adequately substantiated its consideration of the different interests, and the proper conduct of business must be safeguarded during the transition. In theory, it is possible that DNB will not approve the conversion notice. In that case, the parties involved must go back to the drawing board.
Asset managers / asset management companies
The adoption of the new Pensions Act is also no be noted by asset managers / asset management companies. This is related to the legislator's choice to legally prescribe the ‘risk attitude’ on which the chosen investment mixes must be based, which may (and probably will) lead to an amendment of the chosen investment mixes. The question is then (among others) whether the investment mandate is still in line with the (new) risk attitude - and if that is not the case: which agreements within that framework should be reviewed or adjusted. This could include an adjusted fee for the services to be provided and agreements on the investment mandate during the transition period.
Remarks regarding the conversion (‘invaren’)
Conversion leads to a retroactive amendment – no individual right of objection
If the parties involved opt for conversion (‘invaren’), a defined benefit scheme will change retroactively into a defined contribution plan. Existing (accrued) entitlements and benefits will then be converted to the conditions of a defined contribution scheme. Specifically, this conversion means that existing collective pension capital must be distributed to individual accounts. Contrary to common practice, the new Pensions Act stipulates that participants do not have an individual right of objection regarding the conversion (‘invaren’).
Balanced conversion (‘evenwichtig’)
Pursuant to the new Pensions Act, the transition (including the conversion) must be “balanced”. This is an undefined standard, which the social partners, pension funds and employers involved can and (and are expected to) interpret differently. In principle, negative and positive transition effects are acceptable, but the parties involved will have to (be able to) properly justify the choices made. This is also important in order to avoid litigation about the conversion choices made.
It should be noted in that regard that the margin for maneuver is not unlimited: Minister Schouten has stated that every participant should receive at least 95% of their pension benefits.
It seems inevitable that some groups will be disadvantaged in the transition to the new pension system. For example, the transition seems to be particularly disadvantageous for middle-aged workers. This is related to the elimination of the average pension contribution system (the ‘doorsneesystematiek’) in the new pension system, under which (in short) young people 'contributed' to the pensions of older people. To limit the consequences of the transition for this group (and any other disadvantaged persons), compensation can be offered. The starting point for compensation is that this should not entail additional costs for employer and employee.
In the entire transition process, a number of deadlines are of particular importance.
- If parties wish to make use of a transition committee*, they must submit a request to do so before 1 January 2024.
- If the pension scheme is administered by a pension fund, the transition plan must be submitted to the pension fund by 1 January 2025. This does not apply to employers affiliated with insurers and PPIs; for them there is a deadline of 1 October 2026.
- The entire transition process (changing the pension schemes) must be completed by 1 January 2028.
The most important deadline is that of 1 January 2028. That is because if the defined benefit scenes are not changed to defined contribution plans by that date, the pension administrator may no longer administer the pension plan. Moreover, pension will be “tax excessive” and the employer will no longer be insured against death and disability risks. It is therefore very important to complete the transition in a timely manner.
*If the social partners cannot reach an agreement on changing the pension scheme, a temporary transition committee may be established. The transition committee's task is to advise parties entering into a new pension agreement, if these parties make a joint request to do so and agree to be bound by the transition committee's advice.
All-in all, there is work to be done for various parties involved. Do you need help or want to know more about the implications of and different responsibilities under the new Pensions Act? Please feel free to contact us for advice. We will of course be happy to assist.