Compensatory indexation possible on 1 April 2022, in addition to full indexation
Philips Pensioenfonds ended 2021 in a strong financial position. This is good news for all our members: we will grant full indexation on our pensions at 1 April 2022. Pension beneficiaries and non-contributory policyholders will see an increase of 7.4%, which is in line with the full price inflation for the period from January 2021 to January 2022 according to the derived consumer price index, in complete accordance with the indexation ambition for this group. Active members will see an increase of 1.6%, which is the same percentage as the Philips salary scale adjustment under the collective labour agreement (which also applies to Signify employees), in complete accordance with the indexation ambition agreed between the employers and the unions.
Besides these regular increases, we will make maximum use of the legal possibilities for compensating some of the indexation that our members missed out on in recent years, for an additional increase of 0.38% (only in so far as the individual member missed out on indexation).
Intensive discussion by Board about big gap between wage inflation and price inflation
Although the Board of Trustees is of course very excited that the pensions can once more be fully indexed this year, last year saw an extraordinary gap between wage inflation and price inflation. As a consequence, the Board was forced to consider deviating from the existing policy. As the law does not make it possible to raise the indexation for active members, the only option for the Board would then be to establish a lower indexation rate for the pensions of pension beneficiaries and non-contributory policyholders.
The Board discussed this at length, and eventually decided that it would not be a good idea to lower the indexation on the pensions of pension beneficiaries and non-contributory policyholders. One of the reasons for this decision is to make sure that the pension beneficiaries do not lose even more purchasing power, after having felt the impact of the high inflation in their wallets and already having missed out on indexation in previous years. Another factor is that the indexation difference between the two groups is in fact not very great considered in the long term. However, in light of this unusual situation, the Board does feel that the indexation policy should be reviewed. This is explained in the Q&A below.
What is the reason for the difference between the indexation rates for pension beneficiaries and non-contributory policyholders on the one hand and active members on the other?
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 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.
What were the differences between wage inflation and price inflation during the previous 10 years?
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.
Does Philips Pensioenfonds grant its pension beneficiaries more indexation than many other pension funds?
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.
Does it make sense to grant 7.4% indexation to pension beneficiaries and non-contributory policyholders but ‘only’ 1.6% to active members?
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.
What does this mean for the future?
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 is the compensatory indexation established?
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.
Why is the compensatory indexation not linked to the member’s foregone indexation?
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.
My employment began after 1 February 2021. How much compensatory indexation should I expect?
- 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.
- If you joined Philips Pensioenfonds after 1 February 2021 but before 1 April 2021
How will this indexation affect the financial position of Philips Pensioenfonds?
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.
I am an ex-partner. Does the increase apply to both my extraordinary survivor’s pension and my share in my former partner’s retirement pension?
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 1.6% on 1 April 2022, plus up to 0.38% in compensatory indexation (if you actually missed out on indexation). The table below shows how your pension will be indexed.
Share in retirement pension
Extraordinary survivor’s pension
Your ex-partner works for Philips or Signify
Your ex-partner no longer works for Philips or Signify, or has already retired
Your ex-partner is no longer alive
When will I start receiving the higher pension?
We will pay you your April 2022 pension on the first working day in April. This means that your pension, including the 7.78% increase (7.4% regular indexation plus 0.38% compensatory indexation), will be transferred on Friday, 1 April 2022. 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.
I am a pension beneficiary. When will I receive my detailed pension statement showing my pension increase?
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 2022. That annual pension overview shows the 7.78% increase (7.4% regular indexation plus 0.38% compensatory indexation).
I am an active member. When will my pension increase appear in the Pension Planner?
Your accrued pension will be increased by 1.6% on 1 April 2022, plus up to 0.38% in compensatory indexation (if you actually missed out on indexation). This increase will appear in the Pension Planner from 5 April 2022 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 2 April 2021 and 1 April 2022 will be reflected in your pension base. This in turn affects how much your pension is expected to be according to the Pension Planner.
I am an active member or non-contributory policyholder. When will I receive my detailed pension statement showing my pension increase?
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 2022, that increase will only be reflected in your Uniform Pension Overview for 2023, which you will receive around mid-2023. Your new pension situation will appear in the more up-to-date Pension Planner in MijnPPF on 5 April 2022.