Using the years ahead to make a strong start with the new pension system

Using the years ahead to make a strong start with the new pension system

With the introduction of a new pension system within a few years, pensions in the Netherlands are set for an overhaul. For our members, this involves drawing their pension from an individual pension reserve – possibly as early as 1 January 2024. In the face of this new reality, the Board of Trustees of Philips Pensioenfonds has considered how this change will affect the pension fund’s policies. Normally speaking, the pension fund’s policies are geared toward the long term. However, the changes to the system in the short term forces us to deviate from our long-term policy on several points, to make sure that our members can start strongly under the new pension system. Read on to find out more about the decisions that the Board of Trustees has made for the years ahead.

What do we want to achieve by the time the new pension system comes into force?

The key consideration for the Board of Trustees is that all our members should make the strongest possible start under the new pension system: members who are still actively accruing their pension, pension beneficiaries and non-contributory policyholders. With this in mind, the Board has defined two concrete goals:

• 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. Another important factor here is that 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 September, Philips Pensioenfonds had an actual funding ratio of 127.7%, meaning that our financial buffer was 27.7%. In view of the transition to the new system, the Board of Trustees wants to extra protect that buffer. The reasons for that decision are explained below.

A combination of decisions for the years ahead

With such a short time remaining until the new pension system is introduced,  the Board of Trustees has defined new policies in three areas for the years ahead. These decisions are aimed at realising the goals that are described above.

The decisions are as follows. A further explanation can be found below.

1. Adjust the investment policy to protect the existing financial buffer;
2. Make maximum use of the new legal rules about indexation: this will make full indexation during the years ahead very likely, and if only partial indexation is possible, it will be much greater than under the present rules;
3. Minimise the cut in the pension accrual rate that would be necessary given the present low interest rates in case the existing policy was continued,  That way, even our younger members can have a pension that matches the ambition as closely as possible.

1. Protecting the financial buffer

At the moment of transition to the new pension system, 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 (or at least some of them), so it is also in their interests that the buffer is as large as possible when the new system is introduced. When the pandemic began in 2020, our buffer took a severe hit. Since then it has grown significantly, fortunately, and by the end of September 2021 it was at 27.7% of the total pension liabilities. This places Philips Pensioenfonds in a strong position going into the transition. To protect that strong position, the Board of Trustees has decided to invest with a little less risk. If the financial situation does not develop as well as expected during the years ahead, this will offer the pension fund’s funding ratio (and therefore its buffer) better protection than continuing with the investment policy in its present form. If the financial situation develops positively, on the other hand, in hindsight we will benefit slightly less under the new policy than we would with the existing policy. But even then we will transition to the new pension system with a very healthy funding ratio (and buffer).

2. Greater certainty about indexation to increase the pensions

Starting on 1 January 2023, or perhaps even on 1 January 2022, the indexation rules will be less strict for pension funds making use of the ‘transitional financial assessment framework’. Partial indexation will then be permitted if the policy funding ratio is 105% or higher, and full indexation if the policy funding ratio is around 107% or better. Under the present rules, Philips Pensioenfonds may not grant any indexation at all as long as its policy funding ratio is less than 110%, and full indexation is only permitted if the policy funding ratio is 123% or better. Given the pension fund’s funding ratio at present, this means that it is very likely that we can grant full indexation on our pensions for the next two years: for pension beneficiaries and non-contributory policyholders, this means indexation at the same rate as price inflation, and for active members it means indexation at the same rate as the increases under the collective labour agreement at Philips. Pension beneficiaries will notice the less strict indexation rules directly in their monthly pension payments. It is important to note, however, that the transitional financial assessment framework does not affect the rules about granting compensatory indexation. Philips Pensioenfonds can grant compensatory indexation if its policy funding ratio is higher than 123%. Whether compensation for missed indexation is really possible with a policy funding ratio above 123% depends on a legally prescribed limit. This legal limit varies over time, in particular because interest rate developments also affect it.

3. Minimising the cut in the accrual rate for 2022 and 2023: 1.65% accrual

The employers regularly discuss with the unions whether the pension plan should be updated. Recently, they decided not to change the pension plan for the period ahead. The employer’s contribution also remains unchanged. Given the low interest rates and the equal employer’s contribution, continuation of the existing policy  would mean a considerable cut in the pension accrual rate for the employees of the participating companies. The Board of Trustees of Philips Pensioenfonds has decided to limit that cut for 2022 and 2023. This aligns with the goals and the other measures described, and is in accordance with current market practice.

The way your pension accrual is arranged from 1 January 2024 and beyond, is subject of discussion between your employer and the unions. It is possible that a pension scheme will come into effect on that date that fits within the new pension system. If the present pension plan is still in place in 2024, the accrual rate is uncertain. If interest rates do not change during the years ahead, the pension accrual rate in 2024 is likely to be lower than the 1.65% for 2022 and 2023.

Process and considerations behind the decisions

The central question in all of these decisions was how to achieve the goals described above. The Board of Trustees considered numerous policy options before making its decision. For every option, we mapped out how it would help us to achieve the goals described above: how each option would impact the various groups of members (pension beneficiaries, active members and non-contributory policyholders) and the Pension Fund’s funding ratio when the new pension system comes into force. This was done in order to properly balance the respective interests of those various groups. In the end, the combination of measures explained in this article was chosen. What these measures achieve is as follows:

• If the financial situation does not develop as well as expected during the years ahead, the Pension Fund’s funding ratio will be better protected than it would by continuing with the investment policy in its present form. This is important for each group of members, but primarily for the pension beneficiaries.

• It will be easier to index our pensions, and the indexation will be higher, in case the policy funding ratio is less than 123%. Full indexation is therefore more likely during the next two years. This will benefit all the Pension Fund’s members. Pension beneficiaries will notice this directly in their monthly pension payments.
• Although active members will not accrue their pensions at the full rate, the cut in the accrual rate will be relatively limited, without the Pension Fund’s other members suffering disproportionately.

The Board of Trustees of Philips Pensioenfonds believes that this approach provides a fair balance between the interests of the various groups of members.

Positive opinion of the Accountability Body

The Accountability Body of Philips Pensioenfonds was asked for its opinion on the decision about the pension accrual rate for the years ahead. The Accountability Body’s opinion was unanimously positive. This means that the Accountability Body agrees with how the Board of Trustees has balanced the various interests at stake. As explained above, balancing those interests was also a key factor in the other decisions described above.