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’.
Your pension cannot be increased by indexation on 1 April 2021
The Board of Trustees has decided that your pension cannot be increased by indexation at 1 April 2021, as the pension fund’s policy funding ratio was 109.8% at year-end 2020. By law, his funding ratio must be at least 110% to grant indexation. This means the following:
- Retired members and non-contributory policyholders
For retired members and non-contributory policyholders, our indexation ambition is the same as the rate for price inflation based on the derived consumer price index. Last year, that index rose by 1.2%, and current and non-contributory pensions went up by 0% at 1 April 2021.
- Active members
For active members who are accruing pension rights under the flex pension, our indexation ambition is to raise the accrued rights by the same rate as wage inflation. Last year that was 3.4%. At 1 April 2021, the accrued pension rights were raised by 0%.
Suggestion: go to MijnPPF for our letter with more information about the indexation decision 2021.
Indexation policy: a quick introduction
This information explains under what circumstances your pension can be raised.
Money loses some of its value every year as prices rise. This means that the same amount of money buys you less than it did a year before. This is called ‘inflation’. As prices increase, Philips Pensioenfonds seeks to raise its pensions accordingly. For active members, the ambition is to raise the accrued pension rights 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 employees as well. As developments in recent years show, indexation cannot be granted automatically.
The Philips Pensioenfonds indexation table shows precisely when we can grant you indexation. That question depends on the policy funding ratio, which reflects the pension fund’s financial health. If indexation is granted, that same funding ratio shows whether your pension can increase by the same rate as wages or prices.
Indexation for active members
For Philips and Signify 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).
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). In 2020, that index rose by 1.2%.
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). Last year, this wage inflation was 3.4%. This rate is still subject to change.
Whenever the Board of Trustees passes a decision to raise the accrued pension rights, for most members 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, which would otherwise have to accommodate price increases resulting from government measures.
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 2021 the total indexation that has been forgone compared with that ambition is:
- 12.6% for retired members and non-contributory policyholders
- 19.2% for current employees of Philips and Signify accruing pension rights under the flex pension (collective labour agreement and senior directors) plan
- 21.1% for current employees of Philips and Signify accruing pension rights under the flex pension (executives) plan.
Is compensatory indexation possible?
Yes, this is a possibility. Any decision to grant compensatory indexation is made by the Board of Trustees of Philips Pensioenfonds. If the policy funding ratio is higher than 123%, 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 123%. For example, if the policy funding ratio is 128%, 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 128%, it will take 6 1/2 years to make up the entire deficit. In other words, the policy funding ratio will need to be 128% for 6 1/2 years in order to compensate the entire deficit of 6.5%.
When is compensatory indexation possible?
In recent years your pension has not risen at the same rate as the prices. The indexation has fallen behind. This forgone indexation can be ‘compensated’ if the policy funding ratio rises above 123%. Indexation can only be compensated in small steps, however: 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 123%. For example, if the policy funding ratio in a particular year is 128%, you may be granted a maximum of 1% (= 1/5 x 5%) in compensatory indexation. This restriction is imposed by law.
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.
How is it possible that after an investment result of 9.9%, it is still not possible to increase the pensions by indexation?
In 2020, a total investment return of 9.9% was achieved for the entire portfolio. However, the financial health of a pension fund is determined by looking at 'two sides of the balance sheet'. On the one hand, the assets, which have increased due to the good investment results. But on the other hand the (pension) liabilities: the amount required to be able to pay all pensions, now and in the future. And that's where the big part of the problem lies: the drop in interest rates has increased the value of our pension liabilities. On balance, the actual funding ratio at the end of the year was approximately the same as at the beginning of 2021. The so-called policy funding ratio determines the indexation decision. This funding ratio represents the average of the actual funding ratios over the past 12 months. Despite the fact that the actual funding ratio was roughly the same at the beginning and end of 2020, there was a sharp decline in the first half of the year due to the corona crisis. These low actual funding ratios in the first months of 2020 are still affecting the policy funding ratio at the end of 2020, which at 109.8% was too low to be able to increase pensions.
Why is the percentage of 3.4% subject to change?
Wage inflation is based on the collective labor agreement scale adjustment at Philips, also for those who work at Signify. For 2021, we are looking at the collective labor agreement scale adjustment (s) from April 2, 2020 to April 1, 2021. The collective labor agreement at Philips expired on October 31, 2020. At the time the indexation decision was taken, the collective labor agreement agreements had not yet been made from 1 November 2020. If a collective labor agreement scale adjustment follows from those agreements in the period 1 November 2020 to 1 April 2021, then the mentioned 3.4% will still change.
When will more be known about the new scheme from 2022?
Philips recently shared the results of the virtual focus groups at the end of 2020. In these focus groups, pension themes were presented to employees to gain input for the discussions about the future pension scheme. It has been indicated that the results will be discussed with the trade unions with the aim of determining the next steps. It is not yet known what those next steps will be.
Whether your pension can be increased, and if so by how much, depends on the financial health of Philips Pensioenfonds. What is the pension fund’s current situation?