Pensions of members of Philips Pensioenfonds to increase

As established in our indexation ambition, we want to increase the pensions of pension beneficiaries and non-contributory policyholders by the same percentage as price inflation, expressed in the derived consumer price index. For active members, the ambition is to raise the accrued pensions every year by the same rate as wage inflation, expressed as the movement in the collective salary scale adjustments at Philips. This extends to Signify and Versuni employees as well. This gives shape to the arrangements made during the collective negotiations between employers and trade unions, which also include the indexation ambition.

Price inflation and wage inflation are almost never the same. Looking back at the past 10 years, the average indexation granted to active members (not including this year’s indexation) was 0.32% higher per year than the indexation for pension beneficiaries and non-contributory policyholders. If the indexation granted in 2022 is included, pension beneficiaries and non-contributory policyholders received an average of 0.26% per year more than active members over a 10-year period.

Like most other Dutch pension funds, Philips Pensioenfonds bases its ‘price inflation’ on the movements in the derived consumer price index as established by Statistics Netherlands. However, the period over which the movements are measured varies from one pension fund to the next, depending on the date on which the pension fund indexes its pensions (if possible). Additionally, Statistics Netherlands does not publish the finalised indexation rate for a particular month until several months later. If Philips Pensioenfonds can raise its pensions, it will grant the indexation on 1 April, which is why we prefer to use the period from January to January. Basing the indexation on that period means that the rate at Philips Pensioenfonds is higher than the indexation rates of many other pension funds that use a different period. The reason for the difference is that prices for energy and other costs went up significantly during the final months of 2021 in particular. Pension funds that base their indexation on another period, for example October 2020-October 2021, will not include the months when prices (for energy, for example) surged so rapidly until they establish next year’s indexation rate. As a result, our indexation rate will normally be somewhat lower next year than the indexation rate of those other pension funds.

It has long been the ambition of Philips Pensioenfonds to raise the pensions of pension beneficiaries and non-contributory policyholders by the same rate as price inflation, expressed in the derived consumer price index. One of the outcomes of the collective bargaining some years ago was that the employers and trade unions expressed a desire to Philips Pensioenfonds to use wage inflation as the basis for indexation for active members. The Board of Trustees agreed. The employers, the unions and the Board of Trustees made this decision in full awareness of the possibility of years or periods when price inflation is higher than wage inflation. Last year, however, the difference between wage inflation and price inflation was an unprecedented 5.8 percentage points. That is more than at any time during the past 20 years, when the greatest difference was 2.3 percentage points; price inflation was higher than wage inflation in that year too.

 

The Board has discussed at length whether last year’s significant gap between wage inflation and price inflation should be a reason to deviate from the existing policy. By law, Philips Pensioenfonds is not permitted to raise the indexation rate for active members, since that would mean paying out more than the indexation ambition, which is not allowed. One of the concrete questions during the Board’s discussions was therefore whether to lower the indexation rate for pension beneficiaries and non-contributory policyholders.

The Board's reasons for not deviating from the policy

In the end, the Board of Trustees decided not to deviate from the indexation policy this year, and therefore to apply the price and wage inflation rates as dictated by that policy. That decision was based on the following reasons:

• In the long term, the difference between the indexation rates granted to the two groups is not as great. Not including the indexation granted this year, the average indexation granted to active members over the past 10 years was 0.32% higher per year than the indexation granted to pension beneficiaries and non-contributory policyholders. If the indexation granted in 2022 is included, pension beneficiaries and non-contributory policyholders received an average of 0.26% per year more than active members over a 10-year period.
• Given that pension beneficiaries live off their pensions, Philips Pensioenfonds did not want them to miss out on more indexation.
• Last year, to increase the possibilities for full indexation during the years ahead, the Board decided to make maximum use of the new legal rules for indexation in the run-up to the new pension system. Against that backdrop, and considering that the financial position of Philips Pensioenfonds (with a policy funding ratio of 125.8% at the end of 2021) was strong enough to grant full indexation even without those new rules, it would not make sense not to grant full indexation this year.
  
   

The Board has also decided to consider the difference in indexation rates for pension beneficiaries and non-contributory policyholders on the one hand and active members on the other when making its decisions in preparation for the new pension system.

Given the large gap between last year’s price inflation and wage inflation, the Board of Trustees has decided to review the indexation policy. One of the questions that will be asked is what we should do if this year’s price inflation and wage inflation are so different again. In that situation, applying the policy again in 2023 might lead to a significant difference between the indexation granted to the separate groups of members over an extended period of time. The question is whether that is acceptable, in part considering the new pension system that will be put in place during the next few years.

How much missed indexation we may grant is determined by legal rules. Indexation that has been foregone cannot be “compensated” until the policy funding ratio passes a threshold prescribed by law. That legal threshold varies over time, in particular since it is also subject to movements in interest rates. On 31 December 2021, the threshold for Philips Pensioenfonds was 123.9%. Another rule is that indexation can only be compensated in small steps: every year, Philips Pensioenfonds may grant an amount in compensatory indexation that corresponds to 1/5 of the percentage points by which the policy funding ratio exceeds the legal threshold. At the end of 2021, our policy funding ratio was 125.8%; this means that, if we grant everyone the same compensatory indexation as required by the policy, the maximum that we may grant in 2022 is 0.38% (125.8% less 123.9% = 1.9% x 1/5). Every member who missed out on more than 0.38% indexation (which is the overwhelming majority of our members) is entitled to compensatory indexation at the full rate of 0.38% of their accrued pension. Members who missed out on indexation, but less than 0.38% of their accrued pension, are awarded compensatory indexation at the full amount that they missed. Members who did not miss out on any indexation are not entitled to any compensatory indexation; this includes members who only recently became employees of one of the companies associated with the pension fund.

How much indexation a member actually forewent depends in part on the date on which their employment began, and in some cases when it ended and the member retired. This means that our members forewent very different amounts of indexation, and it would be complicated to make practical allowance for all those differences. It is also not common practice in the pension business to make this distinction, and in fact it is uncertain whether it is even allowed by law. Based on these considerations, Philips Pensioenfonds has adopted a policy where, if compensatory indexation is possible, everyone is awarded compensatory indexation at the same rate of their pension, subject to a maximum of the actual indexation arrears.

• If you joined Philips Pensioenfonds after 1 February 2021 but before 1 April 2021
  
  In this situation you missed out on pension indexation on 1 April 2021. However, the indexation that you missed out on is less than 0.38% of your accrued pension. You will receive compensatory indexation at the same rate as the indexation that you actually missed; this is determined individually, and depends chiefly on your salary adjustment on 1 April 2021.
  
   
• If your employment began on or after 1 April 2021
  
  In this situation you did not miss out on any indexation, and you will not be granted any compensatory indexation, since we increase our pensions once yearly, on 1 April.

As a result of the indexation on 1 April 2022, the actual funding ratio will drop by 7.7 percentage points. If we assume the current funding ratio at the end of February 2022, this means that it will fall from 131.3% to 123.6%. This means that the financial position of Philips Pensioenfonds remains healthy even after indexation. The drop will have barely any immediate impact on the policy funding ratio, which represents the average of the actual funding ratios over the past 12 months. Nevertheless, over the months ahead the policy funding ratio is expected to drop as a result of the indexation. The funding ratio at the end of March 2022, reflecting the indexation on 1 April, will be published on the website in mid-April.

If you are already drawing your share in your former partner’s retirement pension, or if your former partner no longer works for Philips or Signify, the information in the letter applies both to the pension that you are receiving and to your extraordinary survivor’s pension. If your policy includes an extraordinary survivor’s pension, but you have not started drawing your share in the retirement pension because your former partner is still working for Philips or Signify, the information in the letter applies only to your extraordinary survivor’s pension. The accrued retirement pension (and your share in it) will be indexed in accordance with the indexation policy for active members. This means that it will be increased by 4.0% on 1 April 2024. The table below shows how your pension will be indexed.

We will pay you your April 2024 pension on the first working day in April. This means that your pension, including the 2.4% increase, will be transferred on Tuesday, 2 April 2024. You will receive your detailed pension statement shortly before that (either by post or in digital format via www.philipspensioenfonds.nl/mijnppf), showing the new gross value of your pension and the net amount that you will receive.

All beneficiaries of a retirement pension, a survivor’s pension, an orphan’s pension or a disability pension will receive their annual pension overview in late-April 2024. That annual pension overview shows the 2.4% increase.

Your accrued pension will be increased by 4.0% on 1 April 2024. This increase will appear in the Pension Planner from Mid-April 2024 forward. Also updated every year on 1 April is your pension base: the portion of your salary on which you accrue your pension. The new information will appear in the Pension Planner in early May, which means that any pay rises that you received between 1 April 2023 and 2 April 2024 will be reflected in your pension base. This in turn affects how much your pension is expected to be according to the Pension Planner.

Every year until you retire, you receive a Uniform Pension Overview based on your pension situation at 1 January. Since your pension will be increased on 1 April 2024, that increase will only be reflected in your Uniform Pension Overview for 2025, which you will receive around mid-2025. Your new pension situation will appear in the more up-to-date Pension Planner in MijnPPF on mid April 2024.