Making sure that your pension keeps its value
We seek to raise your pension annually
Philips Pensioenfonds wants to offer you a pension that retains its purchasing power in the long term, to make sure that it still buys you as much in the future as it does now. That is our ambition. To realise that ambition, we need to adjust your pension to reflect increases in prices (for retired members and non-contributory policyholders) and wage increases (for active members). This is called ‘indexation’.
Overview indexations - 1 April 2023
24 March 2022
To what extent has your pension been increased through indexation in recent years?
Your pension is increased as per 1 April 2023
The Board of Trustees based the pension increase on 1 April 2023 on balancing the highest possible indexation against the need to protect the financial buffer. 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.
- Retired members and non-contributory policyholders
The increase in the pensions in payment and non-contributory pensions as of 1 April 2023 was therefore a total of 4.0%.
- Active members
The increase in the accrued pensions as of 1 April 2023 was therefore a total of 2.1%.
Suggestion: go to MijnPPF for our letter with more information about the indexation decision 2023.
The Board determines annually how much indexation is justified
Within a few years, pensions in the Netherlands will look different if the Future Pensions Act (Wet Toekomst Pensioenen) is adopted. The Board wants every participant in this new pension system to be able to make a good start and that the differences between participant groups are limited, explainable and fair until the moment of transition to the new system. These principles are also important for the decision that the Board takes each year on the increase of the pensions. Read more about this in our magazine Generaties or in this news item.
Evaluation Indexation Policy
In 2022, the Board evaluated the indexation policy, partly because of new pension rules that will come into effect within a few years.
Indexation policy: a quick introduction
This information explains under what circumstances your pension can be raised.
We try to increase your pension each year by wage inflation (for pension accruers) or by price inflation (for pension recipients and members with a paid-up policy). This is our ambition, as described in our indexation policy. However, this indexation is not an automatic given. Every year, the Board of Trustees decides whether your pension can be increased, and if so by how much. Whether or not we can realise our ambition depends on what the law permits, based on our financial health. Another factor is that we want to be in a solid financial position in 2026 when we switch to the new pension system.
Our policy includes the so-called indexation table. This graduated scale shows when and to what extent indexation can take place (statutory) and when pensions can be reduced at a certain level of the policy funding ratio.
Indexation for active members
For Philips, Signify and Versuni employees currently accruing pension rights, the pension fund seeks to raise the accrued rights annually. These annual increases are important to ensure that your pension retains its value when you start drawing it.
Indexation for inactive members
If your employment ends or if you retire, Philips Pensioenfonds seeks to increase your pension annually to reflect price inflation, based on increases in the derived consumer price index published by Statistics Netherlands (CBS).
Questions flash webinar April 2023
Questions were asked during the flash webinar in which the 2023 indexation decision was explained. These questions are answered here.
How was the statutory maximum of 5.0% determined? Wasn't full indexation possible from a funding ratio of 123%? Why then only now at 138.6%?
The law specifies how a pension fund must determine the funding ratio at which full indexation may be granted. This means that the financial health must be such that – based on certain assumptions about inflation and interest rates – full indexation is possible, now and in the future. This limit is not static and changes over time as inflation expectations and interest rates change. The basic principles that a pension fund must use in its calculations are prescribed by the regulator, De Nederlandsche Bank. Last year, high inflation and increased interest rates were incorporated into those principles. Because both are higher than in the past, the limit has risen explosively to 138.6% as of December 31, 2022. A year earlier, the limit was still 123.9%. At the end of 2022, the policy funding ratio of Philips Pensioenfonds was 128.8%. This means that the room for increase is determined by dividing the difference between a funding ratio of 110% (partial indexation is possible from that level) and 128.8% by the difference between a funding ratio of 110% and 138. 6%. This means that 66% of the ambition may be given as a pension increase: 66% of 7.6% (price inflation ambition for pension recipients and non-contributory policyholders) is the statutory maximum of 5.0%.
In 2022, relaxed rules were in force that allowed for a more generous pension increase. These were not applicable at the time of our decision on indexation as of 1 April 2023. You can read more about this in the question 'Why does Philips Pensioenfonds not use the flexible indexation rules that other pension funds have used for their 2023 indexation decision?'
Have the adjustments already been incorporated in the Pension Planner as it is now on the website?
For pension accruors: as of 1 April 2023, your accrued pension has been increased by 2.1%. This can be seen in the Pension Planner since April 5, 2023. Your so-called pension base is also adjusted annually as of April 1. This is the part of your salary on which you accrue pension. This adjustment can be seen in the Pension Planner from the beginning of May. So salary increases between April 2, 2022 and April 1, 2023 are then included in your pension basis. This affects the expected pension that you see in the Pension Planner.
For non-contributory policyholders: as of 1 April 2023, your non-contributory pension has been increased by 2.1%. This can be seen in the Pension Planner since 5 April 2023.
For participants who retired just after April 1, 2022, the total increase is much less than 12% in two years. What is your view on this?
The pensions of pension accruors who retired after April 1, 2022, were increased by 1.6% on April 1, 2022, which was the wage inflation at Philips. That was a full indexation according to our ambition. However, wage inflation was much lower than price inflation (7.4%), so that group did indeed receive less than 12% in indexation. However, the indexation given is the maximum possible on the basis of the agreements that have been made with the employer for those who are still employed. It was not allowed to grant pension accruals more indexation in 2022 than we did. On the other hand, it was also no reason for us to limit indexation for pension recipients and non-contributory policyholders.
You provide figures on inflation and indexation over the last 2 years. What are the figures for the last 5, 10 and 15 years? After all, pensions are something for the longer term.
In the annual assessment that the Board now makes for indexation, we look at the differences in indexation between participant groups since 2011. That was the first year in the Fund's history in which no (full) indexation could be provided. So from 2011 onwards we have looked at what we have given to pension accruors on the one hand and to pension recipients and non-contributory policyholders on the other. Until last year the difference was 2.6% and if we also include 2023, that difference is 4.5% in favor of pension recipients and non-contributory policyholders. The table below shows the calculation of these percentages:
Provided pension accruors
Provided pension recipients/non-contributory policyholders
How will the backlog in indexation be made good? Did the ambition at the start of the new pension system also include catching up as much as possible on the backlog in indexation for the pension recipients?
Due to the decision not to increase pensions in payment in 2023 with full price inflation, the indexation arrears of pension recipients and non-contributory policyholders are increasing. We will take this into account when transitioning to the new pension system. If pensions already accrued come under the new system, the financial buffer must be distributed at that time. When distributing that buffer, we take missed indexations into account.
Exactly how this happens and what it means for you is not yet known. Definitive decision-making on the distribution of the buffer can only take place after decision-making on a large number of other matters within the new pension system has taken place. First of all, employers and trade unions must decide whether the new statutory pension rules will also apply to all pensions already accrued (the so-called 'ingoing'). If this is chosen, it must be assessed whether the entry takes place in a balanced manner. For this, it is not only important how the buffer is distributed, but also, for example, whether resources from the buffer are spent (and if so, how much) on a reserve (the so-called 'solidarity reserve' or 'risk-sharing reserve') or on financing (a part of) the compensation for pension accruors who are disadvantaged by the abolition of the average system in the new pension system. Before final decision-making can take place, advice must also be obtained from the Accountability Body.
What will it mean for Philips Pensioenfonds and for indexation if the new pension law is not adopted by the 'Eerste Kamer'?
If the new pension law is not adopted, we will assess what to do with the temporary measures we have taken with a view to the planned transition to the new pension system. It seems logical that these measures should be abolished at that time, because the longer term then becomes important again. That would mean that we would go back to the old and continue as we did before the introduction of the new pension law. Incidentally, this would no longer mean anything for the given indexation in 2023, that decision has already been taken.
Why do you look at a period of two years when comparing with other pension funds?
In our decision to provide a maximum of 4.0% indexation in 2023, we also looked at what other funds have done. We did this, for a correct picture, by looking at the pension increases in the past 2 years. Then you see that with a pension increase of almost 12% for pension recipients and non-contributory policies, we are very average in terms of indexation. We made two comparisons for this:
- A comparison with 7 other company pension funds:
In comparison, we are slightly lower over 2022 and 2023.
- A comparison with a broader group, including the 5 largest industry pension funds:
Then we see that we have given slightly more than the average at 12%.
Our indexation for 2022 and 2023 is therefore very much in line with the average. A frequently heard comparison is with ABP, which has increased pensions by 12% this year. Our indexation over 2022 and 2023 consisted of almost 8% in 2022 and 4% in 2023, so since April 2022 our participants have had a pension that is almost 8% higher. At ABP, indexation in 2022 was 2.9%.
It is also good to mention that we index on 1 April and look at the January-January period for price inflation. Many other funds increase pensions as of 1 January and therefore use a different period for price inflation. This means that in 2022 we have already included the price increases from the end of 2021/beginning of 2022. Other funds could not yet do that on January 1, 2022 and have done so this year. That is also why it is wise to look at two years for a good comparison.
- A comparison with 7 other company pension funds:
Do I understand correctly that the indexation is now completely dependent on what the Board decides? Is there still a guideline on the basis of which the Board comes to a decision?
Indexation is always a decision of the Board. That has not changed. Until 2015, that decision was even completely discretionary, which means that the Board made the decision based on its own insights. There has been an indexation scale since 2015, which specifies what the indexation would normally be. The Board has always had the option to deviate from this.
Our ambition remains. This means that we continue to strive for indexation in line with our ambition, but at the same time we must also consider whether it is justified in view of the introduction of the new pension system and other special circumstances. This consideration is made with a starting point that is quantitatively determined on the basis of our funding ratio and the number of years until the new pension system. For the indexation in 2023, the calculation resulted in a starting point of 4.0%. We then weigh up a large number of facts and circumstances qualitatively. We use this to assess the extent to which we should maintain the quantitatively determined starting point, or whether we should adjust it upwards or downwards. We have accounted for this consideration in this news item so that each participant can read the grounds on which the decision was made.
How is it possible that pension accruors are lagging behind pension recipients, while wages at Philips have risen much more (since 2010 by almost 40%) than the indexations of pension recipients (almost 15%)?
The indexation ambition of pension accruors on the one hand and pension recipients and non-contributory policyholders on the other is different: wage inflation versus price inflation. We look at the situation from 2011, the year in which we were unable to (fully) index for the first time. Since then, wages at Philips have increased by 27% while price inflation was 29%. In most years we have not been able to (fully) increase pensions in line with the ambition. We increased the pensions of pension accruors by a total of 9%, and those of pension recipients and non-contributory policyholders by 14%. We are unable to place the percentage of 40% stated in the question. Moreover, a comparison is made between the indexation ambition of one participant group and the indexation granted by the other group. So those are apples and oranges.
One of our objectives is to limit the difference in indexation granted between pension accruals on the one hand and pension recipients and non-contributory policyholders on the other. In the past two years there was a large difference between wage and price inflation. As a result, the difference in indexations given has increased. You can read more about this in the question 'You provide figures on inflation and indexation over the last 2 years. What are the figures for the last 5, 10 and 15 years?'. We are keeping a close eye on the current difference of 4.5% in favor of pension recipients for the future, to see what indexation is justified in the coming years.
If we look at the missed indexation, i.e. what did a participant receive and what should this participant have received according to the ambition, then these are now reasonably in line with each other. The indexation arrears for pension recipients and non-contributory policyholders is 16.2% and for pension accruors 18.7%.
The indexation arrears of the pension accruals therefore appear to be higher than that of the other participant groups. This is due to the prescribed calculation method. If you actually calculate, then there are very few pension accruors who have more indexation arrears than 16.2%. In fact, everyone will soon have a comparable indexation arrears compared to the individual ambition: wage inflation for pension accruers, price inflation for pension recipients and non-contributory policyholders.
If in reality it is less then why is it not published differently? As indicated, this is prescribed by law, we must do the publication and communication as stated on the website and in the annual report.
Older pension recipients who die before 2026 are of no use protecting the buffer and would benefit more from higher indexation. How do you view it?
The Board also explicitly discussed special groups, such as the group of older pension recipients. It is certainly true that this group benefits more from indexation in the short term than certainty for the future. That is also one of the reasons that we are looking for a balance between what is maximally responsible (also for the group of pension recipients) to ensure that indexation is adequate. If we look at this group over a longer period of time compared to other participants, we see that the group of older pension recipients were often able to retire earlier than younger participants. In addition, they were relatively less affected by the missed indexations. After all, they have received the target pension for about 20 years and only received less indexation than the target in the last 11 years. A younger pensioner (for example, a 70 or 75-year-old) has suffered from missed indexations since retirement. As a result, the average pension compared to the target is higher for older retirees than for younger retirees.
What if I am fired from Philips: then I have now received the low indexation as a pension accruor and also a high indexation arrears. If I am then out of service, how will this be handled?
If you leave your employment and receive a non-contributory policy, the indexation for pension recipients and non-contributory policyholders will apply to you from that moment on. At present, pension recipients and non-contributory policyholders have had 4.5% more indexation over the previous years than pension accruers. We anticipate that we will somewhat reduce this indexation difference between these two groups. If you then become a non-contributory policyholder (or pension recipient) from a pension accruor, this could indeed have an adverse effect on you. From now on you will receive an indexation based on price inflation, which may be lower than wage inflation at Philips in the coming years. The parties to the collective labor agreement have agreed on an indexation target: price inflation for pension recipients and non-contributory policyholders, wage inflation for pension accruers. We must do nothing but start from that ambition. Within the various participant groups and between pension recipients and non-contributory policyholders, indexation may not be varied. So we cannot compensate for people affected. We understand that this is extra annoying if your employment ends outside of your choice. But regardless of the way in which someone left employment, non-contributory policyholders and pension recipients have a different indexation ambition than pension accruers.
Is hedging interest rate risk a risk now that interest rates are rising?
The purpose of interest rate hedging is to make a pension fund immune to movements in interest rates. The fund then buys derivatives for this purpose. The fund is then protected against interest rate movements through a combination of value development of derivatives and value development in the value of the pension liabilities. If it is decided to hedge interest rate risk to protect against a fall in interest rates, and interest rates subsequently rise, this will lead to losses on the derivatives. It is important to mention that if the interest rate rises, the value of the pension liabilities also decreases. On balance, the coverage ratio then rises slightly.
If we look at the situation at Philips Pensioenfonds, we see that we have had a bad investment year in 2022. However, the funding ratio has remained fairly stable. That was also the intention when we opted for the strategy of additional interest rate hedging in 2021. In short: a necessary consequence of having interest rate hedging, which means that when interest rates rise, the assets decrease, but that this is offset by a decrease in the value of the pension liabilities. As a result, the funding ratio remains stable.
We have opted to almost completely hedge the interest rate risk in order to absorb the risk of falling interest rates. Now that interest rates have risen sharply in 2022, you can say in retrospect that we should not have done that. But we wanted to absorb the risk of falling interest rates. This was achieved because the funding ratio remained stable.
The Board has now decided to set the indexation lower than the maximum possible for pension recipients. But social partners also have a role to play. Who is allowed to make which decisions with regard to indexation?
The social partners, ie the employers and trade unions, are in principle responsible for the indexation ambition. And that is the wage inflation at Philips for pension accruors. In 2023, we granted full indexation in accordance with that ambition. The fact that we have stated that 4.0% is the maximum responsible does not affect the pension accruals because the ambition has been achieved. It is understandable that you think 'it is great that the ambition has been achieved, but purchasing power is declining'. There is not much the Pension Fund can do about that. It is not allowed to allocate more indexation than the indexation ambition. The only option is to grant indexation in full, in accordance with the ambition. Changing the indexation ambition is only possible if the social partners take a decision on this and the Board of our Fund subsequently agrees to this.
How many pension accruers are there in relation to non-contributory policyholders/pension recipients?
Roughly speaking, Philips Pensioenfonds has 14,000 pension accruors (of which just under 1,000 disabled persons with continued pension accrual, the remainder divided over Philips 9,500, Signify 2,500, Versuni just under 1,000), 48,000 pension recipients (pensioners and surviving dependents) and 33,000 non-contributory policyholders.
Are the current and non-contributory pensions indexed in the same way as the accrued pension rights of members still actively accruing their pensions?
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.
Philips Pensioenfonds uses the ‘derived’ consumer price index: what does this mean?
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.
Is compensatory indexation possible?
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.
How much indexation has been forgone in total?
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.
Why is indexation important for active members?
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.
Surely the basic assumption was always that the pensions should reflect price inflation?
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.
What are the various funding ratios, and which funding ratio is used for calculating indexation?
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.
Why is the decision for indexation not based on the actual funding ratio?
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.
What is the reason for the difference between the indexation rates for pension beneficiaries and non-contributory policyholders on the one hand and active members on the other?
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.
I am an ex-partner. Does the increase apply to both my extraordinary survivor’s pension and my share in my former partner’s retirement pension?
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.
Share in retirement pension
Extraordinary survivor’s pension
Your ex-partner works for Philips or Signify
Your ex-partner no longer works for Philips or Signify, or has already retired
Your ex-partner is no longer alive
When will I start receiving the higher pension?
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.
I am a pension beneficiary. When will I receive my detailed pension statement showing my pension increase?
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.
I am an active member. When will my pension increase appear in the Pension Planner?
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.
I am an active member or non-contributory policyholder. When will I receive my detailed pension statement showing my pension increase?
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.
Why is it important to have a financial buffer when we switch to the new pension system?
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.
Was this indexation the maximum rate that was allowed under the legal rules?
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.
Why are the pensions of pension beneficiaries and non-contributory policyholders going up by less than the maximum that the law allows?
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%).
Why is no compensatory indexation being granted this year?
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.
Other pension funds have based their indexation decisions for 2023 on the less strict indexation rules, but not Philips Pensioenfonds. Why not?
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.
How can other pension funds index their pensions by up to 10-12%?
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.
Why is the indexation for active members 2.1%, even though wages at Signify rose by more?
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.
When we switch to the new pension system, the missed indexation from recent years will be taken into account when the financial buffer is shared out. You have not explained how the buffer will be divided then. Why not?
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.
Why does Philips Pensioenfonds raise its pensions on 1 April, not on 1 January?
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.
Visit our news page to find out the latest news, including information about increases in your pension through indexation.
Whether your pension can be increased, and if so by how much, depends, among other things, on the financial health of Philips Pensioenfonds. What is the pension fund’s current situation?