The pension of the future
You have probably already heard the news: the government, employer organisations and unions recently settled on the details of the Pensioenakkoord, or ‘National Pension Agreement’. The idea is that this new national agreement will lead to new legal requirements for Dutch pension plans. We can imagine that you have all kinds of questions. In fact, we have been asked many of those questions already. How does this affect my pension accrual? Will it affect people who are already drawing a pension? What exactly will change? We have listed a number of these questions, together with what answers we can give, based on the little information that we now have. One thing is clear, however: your pension will become less certain. So what does that mean?
Let me start by explaining why so many details of the National Pension Agreement are still unclear. The agreement provides a foundation for introducing new legal rules. However, it is impossible to decide exactly how those rules will take shape until various matters have been decided. Another question is how the pension plans of Philips and Signify will change: influenced not only by legislative developments, but also by the future arrangements that Philips and Signify make with the unions. Philips Pensioenfonds will also have decisions to make based on those arrangements between the companies and the unions. As you can see, quite a few steps have to be completed before we know what the National Pension Agreement will mean for you.
Current situation: you accrue pension rights every year
What we do already know is that your pension will become less certain. Let me try to explain why that is. In the existing system, you accrue a certain value in pension rights every year. With Philips Pensioenfonds, that is 1.85% of your pension base. Your pension base is the portion of your salary on which you accrue pension rights. For example, if your pension base is € 50,000, you accrue € 925 in pension rights every year. After 40 years, you have accrued 40 times € 975, or € 37,000. That pension is not 100% guaranteed, and in some situations we might be forced to reduce it. However, in the present situation pension funds are required to maintain buffers to minimise the likelihood of such a reduction.
Future situation: you accrue capital
In the new system, you will not accrue pension rights, but capital instead. That capital will consist of the premiums that are contributed, and the returns that they generate when those premiums are invested. Pension funds will have fewer buffers, meaning that more of the returns are available for your capital. When you retire, you will then ‘consume’ that capital by withdrawing an amount every year as your pension*. How much pension you will have depends on the value of your capital when you retire, and on the returns that the remaining capital continues to generate after your retirement. Although we can of course calculate how much pension we expect your capital to yield, those calculations will be based on a range of different assumptions, for example what returns your investments will generate. All those assumptions are uncertain, which means that it is also uncertain exactly how high your pension will be in the future.
Your pension will fluctuate more
Once you start drawing your pension, it might fluctuate more from one year to the next: you will be consuming your own pension savings, and the value of those savings depends in part on your investment returns after you retire. If those returns are positive, you will have more money for the remaining duration and your pension will go up. If the investment returns go down, however, the opposite happens and you will have a smaller pension for the remaining duration.
Will this affect retired members too?
Whether these changes will also affect retired members depends on whether the new rules also apply to rights that have already been accrued. In pension jargon, this is called ‘entitlement conversion’. Whether Philips Pensioenfonds will convert pre-existing entitlements is unclear just now: this will be decided further down the road. The basic premise in the National Pension Agreement is that this conversion will be the default rule. However, that rule does not need to be applied if certain groups of members would suffer as a result. If Philips Pensioenfonds converts existing entitlements, the rights of retired members will be converted into an individual capital. The retired members will then withdraw an amount in pension from that capital every year – in the same way as members who are still accruing their pensions now.
Your pension will follow economic developments
So your pension will be less certain. Is that a bad thing? If nothing else, it is precisely what the Cabinet, employer organisations and unions intended the new system to be. Your pension will follow the economy as it goes up and down. That is good news when times are good, but not so good when times are bad. As the Cabinet, employer organisations and unions see it, that makes it easier to explain. If you prefer more security instead of the possibility of a pension that could go up or down, you will be less pleased with this aspect of the new system. However, it is important not to overstate how uncertain your pension will be once you have started drawing it. The fluctuations in your pension from one year to the next should be relatively minor. Still, I am aware that even small changes can pose great problems for some groups of members.
What is Philips Pensioenfonds doing?
Lastly: we are closely monitoring the situation to see how it develops, and we are also actively involved in the discussions about the pension system, through our representation in the overall Federation of Dutch Pension Funds (Pensioenfederatie). We will also provide Philips and Signify with as much help as we can for their decisions with the unions about pensions during the period ahead. Finally, whatever decisions we make about implementing the future pension plans, we will do our very best to accommodate the interests of everyone involved.
* It is possible that the National Pension Agreement will also feature the option of fixing your pension payments once you start drawing your pension. This article assumes that you do not choose that option.