Indexation policy

The ambition of Philips Pensioenfonds is to raise current and non-contributory pensions annually by the same rate as price inflation, expressed in the movements in the derived consumer price index established by Statistics Netherlands (CBS). 

The ambition of Philips Pensioenfonds is to raise the accrued pension rights of employees still working for Philips and Signify annually by the same rate as wage inflation, expressed in the movements in the collective salary scale adjustments at Philips (also for those who work for Signify). 

Whenever the Board of Trustees passes a decision to raise the accrued pension rights, this takes effect on the same date every year: 1 April.

Every year, as prices increase, Philips Pensioenfonds seeks to raise its pensions accordingly. These increases are based on the ‘derived’ consumer price index published by Statistics Netherlands (CBS). That index does not make allowance for price increases that result from new product-specific tax rates. Philips Pensioenfonds is not alone in this: the derived price index is used by most pension funds.

If the policy funding ratio is higher than a certain legal level of the funding ratio, compensatory indexation may be granted. However, it may only be granted in small steps. Every year the pension fund may grant you additional indexation corresponding to 1/5 of the percentage points by which the policy funding ratio exceeds the legal level. At the end of 2022, this level is 138.6%. For example, if the policy funding ratio is 143.6%, you may be granted a maximum of 1% (= 1/5 x 5%) in compensatory indexation. If the total foregone indexation is 6.5%, and assuming that the policy funding ratio remains steady at 143.6%, it will take 6.5 years to make up the entire deficit. In other words, the policy funding ratio will need to be 143.6% for 6.5 years in order to compensate the entire deficit of 6.5%. Whether compensation for missed indexation is really possible with a policy funding ratio depends on the legally prescribed limit. This legal limit varies over time, in particular because interest rate developments also affect it.

No full indexation has been granted since 2011. The ambition of the Board of Trustees is to grant full indexation at the same rate as price inflation (for retired members) and at the same rate as wage inflation (for active members). A review of recent years shows that up to and including 2023 the total indexation that has been forgone compared with that ambition is:

• 16.1% for retired members and non-contributory policyholders
• 18.7% for current employees of Philips and Signify accruing pension rights under the flex pension (collective labour agreement and senior directors) plan
• 20.7% for current employees of Philips and Signify accruing pension rights under the flex pension (executives) plan.

The Philips Pensioenfonds flex pension plan is a collective defined contribution plan with an underlying career-average earnings ambition. That career-average earnings ambition means that the pension that you receive depends not only on your average earnings during your working life, but also the degree to which your accrued pension rights are adjusted during the accrual phase, which is how your pension will retain its value over time.

The ambition of Philips Pensioenfonds is to raise current pensions annually. However, indexation on current pensions is, and always has been, conditional. That means that the pension fund does not have an obligation to increase your pension: the Board of Trustees decides whether to raise the pensions, and if so by what percentage. This will include an examination of various factors, including whether the pension fund’s financial health is strong enough to allow it to raise the pensions and by how much, and what the likelihood is of future changes in its financial health. In all its personalised information about indexation, Philips Pensioenfonds includes texts mandated by law to explain that your pension is not automatically indexed.

One of the factors used to determine the financial position of Philips Pensioenfonds is its funding ratio. If a pension fund has a funding ratio of 100%, this means that its assets are precisely enough for it to pay its existing pension liabilities. Our website shows three funding ratios. Whether or not your pension can be indexed is determined by the ‘policy funding ratio’.

- Actual funding ratio
The actual funding ratio reflects how the pension fund’s assets stand in proportion to its pension liabilities (all pensions payable now and in the future).

- Policy funding ratio
Another way of calculating the funding ratio that is less subject to daily fluctuations is the policy funding ratio. The policy funding ratio is calculated by taking the average of the actual funding ratios over the past twelve months. By law, pension funds are required to use their policy funding ratio for deciding on various matters, for example indexation. The policy funding ratio is also used for other purposes, including to establish whether the pension fund’s buffers are sufficient.

- Required funding ratio
The required funding ratio is the policy funding ratio that the law says pension funds must have. If a pension fund’s policy funding ratio is at the same level as the required funding ratio, this means that it has the financial buffer required by law. The purpose of this buffer is to compensate for fluctuations in the value of the pension fund’s investments and liabilities. Exactly how high the required funding ratio is varies from one pension fund to the next, and is determined largely by the pension fund’s investment policy: the higher the risks in the investment policy, the higher the required funding ratio is.

The indexation policy of Philips Pensioenfonds is based on the policy funding ratio. A pension fund is legally obliged to use the policy funding ratio as the basis for certain policy decisions, for example decisions about indexation. It is less dependent on daily rates, as it reflects the average of the actual funding ratios over the past twelve months. In the indexation table you can see what the consequences are for your pension if the policy funding ratio is at a certain level.

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 and Versuni 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.

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 2.1% on 1 April 2023. The table below shows how your pension will be indexed.

We will pay you your April 2023 pension on the first working day in April. This means that your pension, including the 4.0% increase, will be transferred on Monday, 3 April 2023. 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.

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 2023. That annual pension overview shows the 4.0% increase.

Your accrued pension will be increased by 2.1% on 1 April 2023. This increase will appear in the Pension Planner from 5 April 2023 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 1 April 2022 and 3 April 2023 will be reflected in your pension base. This in turn affects how much your pension is expected to be according to the Pension Planner.

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 2023, that increase will only be reflected in your Uniform Pension Overview for 2024, which you will receive around mid-2024. Your new pension situation will appear in the more up-to-date Pension Planner in MijnPPF on mid April 2023.

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 anymore.

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.

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.