Pensions of Philips Pensioenfonds members go up

In view of the transition to the new system, the Board of Trustees wants to extra protect the financial buffer. Under the new pension system, pensions will follow the ups and downs of the economy more closely than they do now. A financial buffer will help our members to start with a higher pension, or it can be used to set up a ‘reserve’ in case of setbacks in the future. Whatever the case, ultimately the buffer will be spent, directly or indirectly, on our members, so it is in their interests that the buffer is as high as possible when the new system is introduced. In concrete terms, it can be used for the following purposes:

• To top up our members’ individual pension savings, so that they have a higher pension. When the pensions are higher, it is easier to absorb pension cuts than it is with lower pensions.
• Using part of the buffer to form a ‘reserve’. The point of that reserve is to make sure, wherever possible, that we do not need to cut pension benefits if future financial results fall short of expectations.
• To provide active members with at least partial compensation if they are disadvantaged by the switch to the new pension system. We still have to make a decision on this point.
   

According to the existing legal rules for indexation, a maximum partial increase of 59% of the ambition was possible. This amounts to an increase of 1.42% for retired members and non-contributory policyholders and 2.36% for active members. However, from 1 January 2024, Philips Pensioenfonds will use the more lenient indexation rules that are available through the application of the transition FTK. This allows earlier and more indexation to be provided than under the existing statutory indexation rules. On this basis, the Board has been able to decide to fully increase all pensions.

In a few years, when the Dutch Future of Pensions Act (Wet Toekomst Pensioenen) is introduced, pensions in the Netherlands will change. The Board wants every member to get off to a strong start under this new pension system. The Board also believes that any differences between the separate groups of members, in terms of their accrued pensions, at the time of switching to the new system should be minimal, fair and justifiable. In 2022, the Board considered how pension indexation during the years ahead would be affected both by the introduction of the new pension system, and by the unusual circumstances that we are experiencing now, for example the high inflation and the situation on the financial markets. The conclusion was that, every year from 2023 forward, the Board will establish by how much at most our pensions can safely be increased. As a result, we established a slightly lower increase in the pensions of pension beneficiaries and non-contributory policyholders on 1 April 2023 than the legal rules would permit (4.0% instead of 5.0%).

Given the current funding ratio of Philips Pensioenfonds, it is not legally permitted to provide compensatory indexation. The more lenient indexation rules that Philips Pensioenfonds uses do not affect this. Only when the policy funding ratio is within the limit for future-proof indexing compensatory indexation can be given. This is only allowed in small steps. Each year the Pension Fund may provide a compensatory indexation of one-fifth of the number of percentage points that the policy funding ratio is above that legal limit. This limit is equal to 138.8% as of December 31, 2023. An example: if the policy funding ratio is 143.8%, a compensatory indexation of a maximum of 1% (= 1/5 x 5%) may be given in that year. So if the total missed indexation is 6.5%, then with a continuous policy funding ratio of 143.8% it will take 6.5 years before the entire missed indexation is made up. In other words: a policy funding ratio of 143.8% is needed for 6.5 years to fully catch up on the 6.5% deficit. Whether compensatory indexation is possible therefore depends on the Fund's policy funding ratio and the legally prescribed limit. This legal limit varies over time, mainly because interest rate developments also influence it.

The less strict indexation rules for indexation decisions could be applied in 2022. Pension funds that increased their pensions on 1 January 2023 did so on the basis of decisions made in late-2022. This allowed them to apply the less strict rules. However, we index our pensions on 1 April, based on the movements in price inflation during the period from January to January. Our decision on what indexation to grant on 1 April 2023 could therefore not be made in 2022. By the time we made our indexation decision, the less strict rules could not be applied.



On top of this, in late-2022 we decided to establish every year what the maximum indexation is that we can safely grant. You can find out why in this article. As a result of this decision not to grant more indexation than we believe is safe and prudent in order to protect the financial buffer, applying the less strict rules would not offer any benefit now. A key issue in what we believe is safe and prudent is that Philips Pensioenfonds is a grey pension fund. The pension beneficiaries and non-contributory policyholders outnumber the active members by a considerable margin. This means that every percent by which we increase the pensions of the first group takes a significant bite out of the financial buffer.

 

Also, an indexation rate of more than 4.0% would cause the difference between the indexation granted to active members on the one hand and to pension beneficiaries and non-contributory policyholders on the other to increase beyond what we believe is a balanced rate.



It should also be noted that pension funds that applied the less strict rules in their indexation decisions at the end of 2022 saw their buffers drop significantly after indexing their pensions. For Philips Pensioenfonds, protecting the buffer is one of the goals, with a view to increasing the pensions during the years ahead and making sure that our members get off to a strong start under the new pension system.

 

For a proper comparison with ‘the market’, it is important to consider more than the 2023 indexation alone. For example, many other pension funds are only now, in 2023, compensating for the price increases from late-2021. Philips Pensioenfonds instead took the price increases from late-2021 into account when we raised the pensions on 1 April 2022. To properly understand what is happening, then, it is important to look at the total increase over 2022 and 2023. The nearly 12% by which we increased the pensions of pension beneficiaries and non-contributory policyholders is comparable with the total increase at many other pension funds during those years. Another factor is the financial health after applying the indexation. Many pension funds decided to give less importance to preserving their financial buffers. They prioritised indexation in the short term, accepting the fact that their financial buffers will be lower in the run-up to the new pension system. This is clearly a different policy choice than ours.

When we talk about 'differences between participant groups', we mean 'differences in the extent to which we can realize the ambition for these groups'. An ambition has been formulated for the pensions of our participants; this is a pension based on full pension accrual and full indexation. This ambition applies to all participants. That is why we think it is important that if there are differences in the extent to which we can achieve that ambition, these differences are limited, fair and explainable.

Every pension increase must be paid from the financial buffer. And that buffer is there for all participants together. The Board's annual assessment of pension increases therefore examines whether the decision is 'balanced'. If the differences between participant groups are limited, fair and explainable even after the indexation decision, the 'balance test' will usually be met.

The indexation ambition of Philips Pensioenfonds is based on the salary scale adjustments at Philips under the collective labour agreement, including for employees of Signify and Versuni. This is the rule under the pension plan agreed between the employers and the trade unions.

The short answer is that a final decision on how to divide the buffer can only be made after numerous other matters have been decided. First, the employers and unions need to decide whether the new legal pension rules will also apply to pensions that have been accrued, i.e. whether those pensions will be converted to the new system. If so, that conversion will need to be studied to make sure that it is balanced properly. Important factors are not only how the buffer is divided, but other questions as well: whether any part of the buffer, and if so how much of it, will be put towards a reserve (the ‘solidarity’ or ‘risk-sharing’ reserve), for example, or to finance compensation (in full or in part) for members who will be disadvantaged by the transition to the new pension system. Before a final decision can be made on the issue of conversion, the Accountability Body must be asked for its advice.

If Philips Pensioenfonds raises its pensions, this is done on 1 April of each year. The reason why Philips Pensioenfonds uses this date of 1 April is that this corresponds to the employment regulations that are in place at Philips. For example, pay rises take effect on 1 April, and the basic data for pension accrual are also established on 1 April every year. The regular indexation is timed for 1 April to match this.

 

The increase for pension beneficiaries and non-contributory policyholders is based on the derived price index rate from January to January, which is finalised in early March. The increase for active members is based on the collective salary scale adjustments at Philips during the period from 2 April of the previous year to 1 April of the current year. Every year in March, we announce by what rate the pensions will go up on 1 April, and you receive a personalised letter from us explaining our indexation decision.