Pension increase on 1 April 2023 based on balancing the highest possible indexation against the need to protect the financial buffer
Once the Dutch Future of Pensions Act (Wet Toekomst Pensioenen) is introduced, it will change how pensions work in the Netherlands. For members of Philips Pensioenfonds, the new pension system is expected to take effect in 2026. The Board of Trustees wants all members to get off to a strong start under that new system, making it in the interests of all our members that the financial buffer is as high as possible at the time of the switch. Another consideration is that any differences between members, in terms of how much pension they have accrued by then, should be minimal, fair and justifiable.
With this in mind, the Board recently established by how much the pensions can safely be raised on 1 April 2023. The Board considered not only the need to protect the financial buffer, but also the current situation: for example, indexing the pensions is more important than ever just now because of the high inflation, which our pension beneficiaries are feeling in their wallets. Based on these factors, the Board’s conclusion is that the pensions of pension beneficiaries and non-contributory policyholders should go up by 4.0% on 1 April 2023. This will compensate more than half the price inflation over the past year. The accrued pensions of active members will be increased by 2.1%, which is the same as the wage inflation.
Each of our members has received personalised information about their pension increase on 1 April 2023. To help you understand what factors the Board considered, this news item explains how the decision came about.
27 March 2023
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What do we hope to achieve by the time we switch to the new pension system?
In late-2021, the Board established what it will take to make sure that all our members get off to the best start possible under the new pension system, whether still actively accruing their pension, or a pension beneficiary or non-contributory policyholder. The Board has defined two concrete goals for when we switch to the new pension system.
- Every member’s pension should reflect the ambition as closely as possible
We have defined an ambition for our members’ pensions: a pension that is based on full pension accrual and full indexation. Our goal is to offer every member a pension that reflects this ambition as closely as possible when the new pension system comes into force. Any differences between members must be minimal, justifiable and fair.
- Healthy finances with the highest possible funding ratio
If a pension fund has a funding ratio of 100%, that means that it has precisely the right amount of assets to fulfil its existing pension liabilities. If the funding ratio is greater than 100%, the portion above that 100% is called a ‘reserve’ or ‘financial buffer’. At the end of 2022, Philips Pensioenfonds had a current funding ratio of 128.8%*, meaning that our financial buffer was 28.8%. In view of the transition to the new system, the Board wants to extra protect that buffer.
When the new pension system is adopted, it is likely that the buffer will largely be divided among our members’ personal pension reserves. It is also possible that some of the buffer will be used to compensate (at least in part) active members who are disadvantaged by the transition to the new pension system. Whatever the case, ultimately the buffer will be spent on our members, so it is also in their interests that the buffer is as large as possible when the new system is introduced (see the Q&A at the bottom of this page for details).
*The funding ratio as stated here differs from the funding ratio as published later in the 2022 annual report. This is due to a correction that has been made. The correction made to the funding ratio has no influence on the indexation decision taken in 2023.
What are we doing to realise these goals?
To realise these goals, we have decided to consider every year, until we switch to the new pension system, by how much we can safely increase the pensions (i.e. how much indexation we can award). This means that the indexation during the years ahead will depend not only on the financial situation at the time of indexation, but also on what we expect the financial situation to be, and what we want it to be, when we switch to the new pension system. However, our ambition is still the same: to grant all our members as much of the indexation ambition as possible. If our decision means that we cannot grant full indexation, this will mean more missed indexation, which will be a factor consider when the new pension system is adopted.
How do we establish how much the pensions can safely go up?
To determine what a safe and prudent level of indexation is – considering the two goals described above – we ask ourselves the following questions:
- What do we want our situation to be when we switch to the new pension system?
For all our members to make a strong start under the new pension system, our finances need to be healthy. We have established what ‘funding ratio’ (a measure of our financial health) we will need when we switch to the new system in 2026.
- What is the maximum possible indexation during the years ahead, given the minimum funding ratio that we want to have in 2026?
We calculate how much indexation we should be able to grant every year in order to be at the minimum funding ratio that we want to have in 2026. This is based on two assumptions:
- The maximum possible annual indexation is determined using the same method every year until the new system is introduced: we calculate what indexation is possible (given the minimum funding ratio that we want to have in 2026, as explained at 1) if we increase the pensions by the same rate every year during the period leading up to the new pension system.
- This maximum indexation is calculated using a simplified method, where only the impact of future indexation on the funding ratio is considered. In this step, any other current facts and circumstances that might cause the funding ratio to go down are disregarded. Instead, they are considered in the next step: step 3.
- How will current facts and circumstances impact this maximum indexation?
The second question involved calculating what the maximum possible indexation is during the years ahead, based purely on the impact of indexation on the funding ratio. All other facts and circumstances were disregarded during that step. However, the third question is about those facts and circumstances: if all the facts and circumstances that might be relevant for this decision are taken into account, does the maximum rate calculated in the second question need to be adjusted, to go up or down? Possible factors include:
- The financial health of Philips Pensioenfonds.
- How much indexation is permitted under the legal rules, based on the financial situation.
- Wage inflation and price inflation (the indexation ambition for active members and for pension beneficiaries, respectively), and the difference between them.
- The differences in the indexation granted to the separate groups of members during previous years.
- The situation on the financial markets.
- How many years it will be until our members switch to the new pension system.
- What other pension funds are doing in terms of indexation.
What is the maximum prudent indexation rate for 2023?
The Board’s conclusion is that a maximum rate of 4% may safely be granted for 2023. This conclusion was reached by going through the steps described above.
- The Board believes that the minimum funding ratio in 2026 should be 110%, which represents a financial buffer of 10%. When the new pension system is adopted, it is likely that the buffer will largely be divided among our members’ personal pension reserves. It is also possible that some of the buffer will be used to compensate (at least in part) active members who are disadvantaged by the transition to the new pension system. Whatever the case, ultimately the buffer will be spent on our members, so it is also in their interests for the buffer to be as large as possible when the new system is introduced. However, it is also quite possible that we might decide during the period ahead that the minimum funding ratio in 2026 needs to be higher than anticipated. For example, we might need to use part of the buffer for a ‘solidarity reserve’ under the new pension plan.
- Based on the minimum funding ratio that we want to have in 2026, the highest possible annual pension increase would be 4%.
- The Board next considered which of the facts and circumstances described above are relevant this year, and took a careful look at those facts and circumstances. The conclusion was that they did not give any reason to change that percentage. The factors that the Board considered included:
- The situation on the financial markets
The financial markets are constantly subject to a high level of uncertainty. Important causes for this uncertainty are the war in Ukraine that is dragging on, the high inflation, and the resulting interest rate hikes by the various central banks. For the Board, this was enough reason to decide that the maximum should be no more than 4.0% at most.
- Wage inflation, price inflation, and the difference between them
The indexation ambition for active members is the wage inflation at Philips (including for active members working for Signify or Versuni) for the period from 2 April of the previous year up to and including 1 April of the current year. The ambition for pension beneficiaries and non-contributory policyholders is the rate of price inflation from January of the previous year to January of the current year. Price inflation and wage inflation are almost never the same. Looking at the past 10 years (including the increases for 2023), pension beneficiaries and non-contributory policyholders received more indexation than active members: not including the indexation on 1 April 2023, the difference was 2.6%. If pension beneficiaries are granted 4.0% indexation and active members are granted 2.1%, that difference will go up to 4.5%. The Board feels that it would be unwise to allow the difference to increase any further.
- What other pension funds are doing in terms of indexation
To do the situation justice, we looked at the total increase for 2022 and 2023 together (see the Q&A at the bottom of this page for details). The rate of nearly 12% for pension beneficiaries and non-contributory policyholders is comparable with the total increase at many other pension funds during those years. As such, the indexation decisions of other pension funds did not give the Board reason to grant more indexation than 4.0%.
- The situation on the financial markets
Roel Wijmenga, chairman of the Board of Trustees of Philips Pensioenfonds, explains:
“The Board believes that every member should get off to a strong start under the new pension system, and that any differences between the various groups of members must be minimal, fair and justifiable.”
How does this affect active members?
Your accrued pension will go up by 2.1% on 1 April 2023
This means that your accrued pension will go up by the full rate of the CLA salary scale adjustments at Philips, also if you work for Signify or Versuni. This is the maximum amount permitted under the agreement with the employers. For the years ahead, we expect that the accrued pensions can be increased by at least part of the wage inflation rate.
In 2023, every active member will accrue pension at a rate of 1.85%
In 2022, the accrual rate was 1.65%. For this year, the accrual returns to the targeted rate of 1.85%. This means that active members will accrue more pension in 2023 than they did last year. For 2024 too they will accrue 1.85%, at least if the legal rules permit; this will be determined at the end of 2023. A decision on the pension accrual from 1 January 2025 will be made at a later date.
What does this mean for pension beneficiaries and non-contributory policyholders?
Pensions that are already being paid out or have been made non-contributory will go up by 4.0% on 1 April 2023
This is slightly less than the maximum increase permitted under the legal rules, based on our financial situation (5.0%). Our ambition was 7.6%: the same as the price inflation for the previous year. For the years ahead, we expect that pensions that are being paid out or have been made non-contributory can be increased by at least part of the price inflation rate.
The 4.0% increase on 1 April 2023 brings the total indexation of the pensions of pension beneficiaries and non-contributory policyholders for the past two years (when inflation first started to surge) to nearly 12%. Last year we compensated the rising prices from late-2021 by raising our pensions by a total of almost 8%. This means that we have compensated around 80% of the inflation during the past two years. Since the indexation granted is less than our ambition, this means more middes indexation, which will be a factor to consider when the new pension system is adopted.
Questions and answers (FAQ)
Want to read more?
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 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:
- The financial buffer can be used for the individual pension savings of our members when we switch to the new pension system, to give them a higher pension. A higher pension means that any drops in the pension will have less impact than if the pension is lower.
- Another possibility is that the employers and the unions will ask Philips Pensioenfonds to use part of the buffer to set up a reserve: a ‘solidarity’ or ‘risk-sharing’ reserve. That reserve can then be used in case of setbacks in the future.
- It is also possible that some of the buffer will be used for compensation (or at least partial compensation) for active members who are disadvantaged by the transition to the new pension system.
Legally, the pensions of pension beneficiaries and non-contributory policyholders could have been raised by a maximum of 5.0%. However, the Board decided that the maximum prudent indexation rate was 4.0%, which is slightly below what the law allowed.
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%).
Compensatory indexation may be granted only if the policy funding ratio is above a threshold that is defined by legal rules. For Philips Pensioenfonds, that threshold was around 138% at the end of December 2022. The policy funding ratio was 128.8%, which is substantially less. However, at the end of 2021, compensatory indexation was possible when the policy funding ratio was around 124%. In 2022 we were then able to grant a little compensatory indexation, in the form of 0.38% on 1 April 2022. Because the legal threshold depends in part on inflation and the movements in interest rates, it is now significantly higher, as noted above.
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.
It is important because our indexation ambition extends to all our members, and we want the actual indexation to be as close to that ambition as possible for everyone. Every time we raise our pensions, it comes out of the financial buffer – and that buffer is intended for all our members together. If we cannot realise the indexation ambition to the same extent for everyone, we believe that the differences should be minimal, fair and justifiable.
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.