The National Pension Agreement and how it will work in practice
In early July 2020, the employers’ organisations, the unions and the Cabinet settled on the practical details of the National Pension Agreement. The main principles were originally presented on 5 June 2019. The National Pension Agreement deals primarily with pensions that employees accrue with their employers, for example your pension with Philips Pensioenfonds. The National Pension Agreement represents a fundamental reform of the Dutch pension system. The practical details will have to be codified in legislation by 1 January 2022 at the latest, and the deadline by which every pension fund in the Netherlands must update its pension plans to reflect the new rules is 1 January 2026. However, a great deal of work still remains to be done before then. Firstly, these practical details of the National Pension Agreement still need further refinement before the arrangements can be codified in law. Secondly, the employers’ organisations and unions have numerous decisions to make, both at the industry level and at the level of individual companies. Lastly, decisions will also be made by the boards of the pension funds. As a consequence, it is currently still unclear when the pension plans that Philips Pensioenfonds administers will be adjusted to the new rules.
Do you have any questions about the Pension Agreement and its details? Below you will find a number of questions and answers that provide more insight into the new Pension Agreement and its elaboration.
What are the main principles of the National Pension Agreement?
The National Pension Agreement primarily involves a fundamental overhaul of the pensions that employees accrue with their employers within the Dutch pension system, for example your pension with Philips Pensioenfonds.
The National Pension Agreement provides for two types of pension plan. Employers and unions can agree on one of these options. Under each of those pension plans, you accrue pension savings that are yours alone. The first option is similar to defined contribution plans that already exist, and involves accruing an individual pension capital. In the second option, which is entirely new, the pension savings represent a share in a collectively invested pension capital. Besides plans in which you accrue individual pension savings (known as defined contribution plans), other plans currently exist under which members receive a commitment for pension entitlements. At Philips and Signify, this is done on the basis of a fixed contribution paid by the companies. If this contribution is sufficient to award the aspired pension accrual, it is granted. If not, the accrual percentage will be reduced. Pension plans such as these no longer exist within the new pension system, which instead will only feature the following types of pension plan:
- Individual defined contribution plans: under these plans, members do not accrue pension entitlements, but rather an individual pension capital. Generally, members may decide for themselves (within a set of defined parameters) how that capital should be invested and what risks they are willing to take. When you retire, you will draw your pension benefits from your own individual capital. Similar pension plans already exist in the current system.
- ‘New pension contracts’: these are also defined contribution plans. Members accrue pension capital as individual savings. Unlike option 1, however, your pension savings are collectively invested in the pension fund, together with the pension capital of other members. Your pension savings consist of a share in that collectively invested capital. The returns generated by the various asset classes are divided among the members, according to their age: following a strong investment year, the pension savings of younger members will grow proportionately more than those of older members, and vice versa after a poor investment year. The thought process behind this setup is that younger members have more time than older members to recover from a poor investment year, and so can afford to take greater investment risks. This is a new type of pension plan, which has no equivalent under the existing pension system.
A key aspect of the National Pension Agreement is a new way of accruing pension rights, and the pension premium that is paid for it. Currently, every employee who earns the same salary accrues the same amount of pension every year, regardless of age. Given that the premiums contributed by younger members will generate returns over a longer period than the premiums of older members, the pension accruals of those younger members are cheaper. This is taken into account at Philips Pensioenfonds and employers also pay less premiums for young people than for older people*. However, this is not the case with most pension funds and the same premium is charged for all members, regardless of their age. Both with Philips Pensioenfonds and with those other funds, the pension accrual is the same for everyone. Given that pension accrual is cheaper for younger members, the Cabinet, employers’ organisations and unions believe that it is fairer for them to pay lower premiums to accrue the same amount of pension with all pension funds (like they do now with Philips Pensioenfonds) - or to accrue more pension for the same premiums, which is the option chosen in the National Pension Agreement. Under the new system, all members of a particular pension plan will have access to the same premiums. Younger members will then accrue more pension, while older members accrue less.
In and of itself, this seems arguably fairer than the current system. However, adopting the new setup will create a transitional problem: switching to the new system will work to the disadvantage of everyone who has already accrued pension rights under the current system. This will particularly affect members in the age bracket of more or less 45, who will accrue less pension in the future, without having benefited from higher pension accrual in the past. According to the Cabinet and the social partners, this disadvantage must be compensated.
This can involve significant costs. You can find more information about compensation in the question "Will disadvantaged members be compensated?"
* If all the contributions paid by the employers are added up and this total amount is expressed as a percentage of the pension base sum (the pension base is the salary over which pension is built up), this results in 29.4% for the flex scheme. This is the contribution percentage owed by the employers, which can also be found in the pension regulations. This percentage applies for a period agreed between employers and pension fund. Employees pay a personal contribution of 2% (Philips) or 5% (Signify).
Why is the pension system being reformed?
The memo that Social Affairs and Employment Minister Wouter Koolmees sent to the Dutch House of Representatives on 22 June 2020, setting out the basic outline of the practical details of the National Pension Agreement, contains the following description of the purposes and parameters of a new system:
'In the National Pension Agreement that was adopted in 2019, the following have been agreed as the purposes that the new pension system must fulfil:
- The new pension system must offer a greater probability that pensions will retain their purchasing power. Pensions will be more likely to go up in good years, but more likely to go down in lean times.
- The system must become more transparent and more personalised
- The system must better reflect developments in society and on the labour market.
The National Pension Agreement also contains a series of parameters:
- Retirement pensions must be for life.
- The reform should not be used to economise. Sufficient opportunity should exist to realise the current targets for projected pensions.
- The premiums and pension benefits should be as stable as possible.
- The transition should have a balanced impact on everyone involved and across all generations.
- Anyone who is disadvantaged by the transition must be properly compensated.
- Wherever possible, existing pension entitlements and pension benefits must carry over to the new pension contract selected.
- Pension administrators must have sufficient possibilities to record returns on the investments.
- The transition must be practicable and financially viable.'
The new system clearly satisfies a number of these purposes and parameters: for example, it is evident that pensions based on individual savings will be more personalised, and that the new system will lead to greater stability in pension premiums. However, it is already apparent that the new system will almost definitely not satisfy other points, or not offer any improvement. This applies, for example, to the stability of pension benefits. For still other elements, it is impossible to predict at this point whether they can be fulfilled: that will not become clear until it is established precisely what shape the country's various pension plans will take. This will require numerous decisions, both at the political level and by employers, unions and pension fund boards. This is illustrated by the purpose that members who are disadvantaged must be properly compensated.
Some of the issues that are clearly not met or of which it remains to be seen whether or not they will be met because further decision-making is required, will be discussed below in this Q&A.
Some of the issues of which it is unclear whether they will be fulfilled are addressed in this Q&A.
Will pensions become more transparent under the new system?
Under the new system, each member will have their own personal savings. Each member will be able to see what the value of those savings is at any given moment and what factors cause that value to go up (such as the premiums contributed and investment gains) or down (including the benefits withdrawn and investment losses). In that sense, pensions will be transparent under the new system. What will be unclear however is what benefits members should expect to receive in the end from their pension savings: those benefits will depend on uncertain future developments, for example what returns the investments will generate. Given that investment returns will have a more immediate impact on the value of individual members’ pensions under the new system, this means less certainty regarding the benefits. In that sense, therefore, pensions will not be any more transparent under the new system.
In short: the new system is more transparent about what is in the individual pension savings of the members at some point, but not about the level of the pensions to be paid.
Is it true that no-one will be disadvantaged by the new system?
No, unfortunately that is not true. Since pension values will be affected more directly by economic fluctuations, some members will have a lower pension under the new pension system than under the existing rules - even if they are compensated. Although the pensions might be higher than under the present system, they could also be lower. As soon as it is clear exactly how the new Philips and Signify pension plans will be structured, we can run calculations to see how high our members may expect their pensions to be. However, those calculations must necessarily be based on various assumptions regarding investment returns and movements in interest rates over multiple years. It will be unsure therefore whether those predictions will be accurate, even allowing for a margin of error.
What we do know, however, is that the possibility is very real that a particular group of members will lose out (without compensation): active members in the middle age bracket. Members in this group will accrue less pension in the future, without having benefited from a higher pension accrual when they were younger. The premise in the National Pension Agreement is that this group will have to be compensated properly if it is established that they will lose out.
Will disadvantaged members be compensated?
The possibility is very real that middle-aged members will be disadvantaged by the National Pension Agreement. This was acknowledged when the Agreement was signed, together with the need for a proper compensation plan. It is unclear, however, who will finance that compensation. According to the National Pension Agreement, the compensation must be cost-neutral for both employers and members. The possibility of the pension funds paying the compensation is explicitly being considered: an option is being created under the law that will make it possible for pension funds to cover the costs of the compensation, at least in part. That would mean that some or all of the compensation would be paid from the pension funds’ assets. It remains to be seen whether Philips Pensioenfonds will go this route. If it does, it will be important to make sure that this takes place in a balanced manner. It will be impossible to determine until all the details of the new pension plan and how it will be funded have been decided. The Board of Trustees will need to weigh and balance all the interests that are at stake. However, even if proper compensation is provided for members who are disadvantaged by the implementation of the new pension system, it still cannot be guaranteed that no-one will lose out under the new pension system. Most likely, the compensation will be based on a scenario of economic neutrality: if the economy then suffers a downturn, the compensation will not be enough to prevent the disadvantage.
Will solidarity between younger and older pension fund members still be a feature of the new system?
Yes: solidarity between younger and older members will still be an expected feature in most pension plans, but not as strongly as in the current system. Pension accrual will no longer be determined by age-based solidarity: instead, all members with the same level of salary will add the same premiums to their pension savings. Those premiums will buy more pension for younger members than for their older colleagues. In the pension system as it exists now, both younger and older members accrue the same amount of pension rights. Effectively, this means that younger members with most pension funds are contributing towards their older colleagues’ pension accrual. That will not be the case in the new pension system.
In the new pension system, investment returns will be added directly to each individual member's personal pension savings. This means that the pensions will become more personalised, and personalised means less solidarity - and less solidarity means that the value of the pensions will be tied more closely to fluctuations in the economy. Whether or not you consider this to be good depends on how strongly you feel about knowing for sure what your pension benefits will be.
If the new pension contract is chosen (for information about this type of plan, see the question "What are the main principles of the National Pension Agreement?"), the solidarity between separate generations that remains in the new system, will take the form of a ‘solidarity buffer’. The pension funds may decide for themselves how high they want that reserve to be, subject to a maximum of 15% of the pension fund's total assets. If the investments yield high returns, some of those returns may be added to the solvency reserve, or the reserve can be used to supplement lower returns. The larger the reserve is, the stronger the solidarity will be under the new system - and more solidarity means more stable benefits.
If the new pension contract is not chosen, but an individual defined contribution plan is chosen, industry pension funds and occupational pension funds may also opt to form a solidarity buffer. Strangely, this is not possible with company pension funds such as Philips Pensioenfonds, based on current plans. It is not excluded that this possibility will still be created for company pension funds.
Under the new system, who will bear the risk of poor investment returns?
Under the new system, the investment risks will lie with the individual members. While this is effectively already true in the existing pension plan of Philips Pensioenfonds, under the new system the investment returns will have a more direct impact on your pension savings or the amount of your benefits. Your pension will follow fluctuations in the economy more directly. This means that you will potentially have a higher pension (if the investment returns are favourable), but you also run the risk of a lower pension (if the returns are low). As a result, your pension will be less certain. It is also important to note that pension funds will have a ‘solidarity buffer’ if the new pension contract is chosen (but not if an individual defined contribution plan is chosen). The pension funds may decide for themselves how high they want that reserve to be, subject to a maximum of 15% of the pension fund's total assets. If the investments yield high returns, some of those returns may be added to the solvency reserve, or the reserve can be used to supplement lower returns. This will make the benefits somewhat more stable, although they will still be less stable than in the present system.
Under the new pension system, will I be allowed to make my own investment decisions?
This depends on the plan chosen. If the new pension contract is chosen, you will not be making your own investment decisions. You may have your own pension fund, but this pension fund will remain collectively invested, just like now. This means, the total pension capital of all collective members is invested by the pension fund. You do not have your own choices with regard to investments.
If the so-called individual defined contribution plan is chosen, you will have the opportunity to make your own investment decisions. For example, you could decide how to spread your pension savings across several investment funds such as an equity fund or a bond fund.
Which pension funds will fall under the new pension system?
After transition to the new system, the new rules will in any case directly apply to pension accrual. The arrangements for the pension rights that employees and retired members have accrued at the time of transition to the new system are as follows. The basic principle is that the new rules will also apply to the accrued pension rights, if the social partners ask for that. In pension jargon, this is called ‘entitlement conversion’. However, this basic rule will not necessarily apply if it disproportionately disadvantages certain groups of members. It is uncertain at this time whether Philips Pensioenfonds will convert the existing pension entitlements: this will be decided further down the road. No decision can be made at this time, as it is unclear how the employers and the unions will structure the new pension plan, and the rules for entitlement conversion have not yet been detailed. If Philips Pensioenfonds converts existing entitlements, all accrued pension rights will be converted into an individual capital for each member - including the pensions that members are already drawing. Those members will then withdraw an amount in pension from that capital every year.
Is entitlement conversion legally allowed?
The new pension system must of course be compliant with the relevant laws and regulations. That includes European regulations - and in this case specifically the European Convention on Human Rights and Fundamental Freedoms (ECHR), which states that every person is entitled to the peaceful enjoyment of his or her possessions. At a minimum, this covers the pensions that employees and retired members have previously accrued. EU Member States have the authority to deprive persons of their possessions or to control property if this is required for reasons of public interest. The ECHR lists a series of criteria for determining whether the deprivation of possessions or control of property is legitimate. Ultimately, the European Court of Human Rights will have to decide whether those criteria are satisfied. In the memo that Social Affairs and Employment Minister Wouter Koolmees presented to the Dutch House of Representatives on 22 June 2020, describing the main principles for the practical details of the National Pension Agreement, it is assumed that the likelihood that the European Court will rule, if asked, that these criteria are not met, is small: ’Potential risks of an unjustified infringement of the right to own property will be (...) very minor.’
What will happen with the indexation deficit when the new pension system is adopted? Will it be compensated first or will it be lost forever as a result of the transition?
It is unclear what will be done with the indexation deficit when the new pension system is adopted. That will depend on various factors, for example whether or not the existing entitlements will be converted under the new pension plan (for more information about entitlement conversion, see ‘What pension funds will fall under the new pension system?’) If Philips Pensioenfonds converts existing entitlements, all accrued pension rights will be converted into an individual capital for each member - including the pensions that members are already drawing. The calculation of your personal pension capital will factor in, in so far the reserves of the fund are sufficient, the indexation deficit, although precisely how will depend on the conversion method that is adopted. It is currently unclear what that method will be. The capital that as a consequence of possible entitlement conversion is reserved to your pension savings will be made up of two parts. One part consists of your accrued pension rights after they have been converted into a personal capital. The second part is an amount that will possibly, if the reserves of the fund are sufficient, be awarded to you for indexation in your personal capital. The second part does not represent a value to compensate for the entire indexation deficit: if the existing system was to remain in place, that deficit would not be made good all at once either. If the existing system was continued, the indexation deficit could be compensated over a longer time if the funding ratio moved in the right direction. The same is true under the new system, if economic developments are favourable. The difference is that under the new system the compensatory indexation will be reflected in an additional increase in the value of your pension capital, rather than a higher pension, as is currently the case. If Philips Pensioenfonds does not convert existing entitlements, then the current rules regarding (catch-up) indexation will in principle continue to apply to the pensions that have not yet been converted. In principle, because Minister Koolmees has indicated that it will still be considered whether these rules will be amended.
Will older/retired members by definition be disadvantaged by entitlement conversion?
No, they will not by definition suffer any disadvantage. It is impossible to say precisely how adopting the new system will impact the various groups of members until it becomes clear exactly what shape the pension plan will take at Philips Pensioenfonds. This will hinge on the pension fund's financial position at the time of the transition, but also on other factors, including for example:
- Which of the two types of contracts is chosen;
- Depending on the choice of plan: how large the solidarity buffer is and how it is filled (is part of the current buffer used for this?);
- If compensation is the case: How much compensation will be needed, and how will it be financed;
- What figure will be used for the projected returns? The projected returns represent the returns that are used at a member's retirement date to estimate the future pension benefits. The lower the projected returns are, the lower the monthly pension will be, and vice versa. You can find more information about the projection yield in the question "Will actuarial interest rates lose their relevance under the new pension system?"
Only once all the details of how the pension plan will work and how it will be financed will we be able to calculate how the pension plan is likely to affect individual members and groups of members, and to assess whether everything (with or without entitlement conversion) is properly balanced.
Will actuarial interest rates lose their relevance under the new pension system?
Actuarial interest rates as we know them will disappear entirely in the new pension system.
The so-called projection yield* is important in the new pension system. That is the return that is expected to be made in the future with the investments in the individual pension savings of the member. That expected return, or projection return, depends on the investments in the pension savings. The higher the expected future return, the higher the pension payment. In general it is important that the projection efficiency is determined in a prudent manner. After all, an excessively high projection return does lead to a higher pension benefit in the beginning, but that benefit will have to be lowered later if the actual return falls short of the projection return. Incidentally, market interest rates (from which those actuarial interest rates are derived) will still be relevant under the new system, however, in particular for pension beneficiaries.
For pensioners, there will be relatively many bonds in the individual pension savings. The (market) interest on those bonds partly determines the projection yield and thus the level of the pension payment.
* If the member in an individual defined contribution plan chooses to purchase a fixed pension benefit , the projection return is not important and the amount of the pension benefit depends on the purchase rate of the pension provider.
When will members first notice the effects of the National Pension Agreement?
For now, you will not notice any effects of the National Pension Agreement. First, the arrangements will need to be codified in law, which will involve making numerous decisions. Besides, Philips, Signify and the unions will have to decide on the companies’ pension plans. Moreover, the Board of Trustees will have to decide whether or not the pension plans that the companies have agreed with the unions can be administered. Although all this can partly happen simultaneously, it will be a while before we can share any news. We will keep you informed of any developments.
Do I need to do anything myself?
No action is required on your part. The Dutch Cabinet is working with the employers’ organisations and the unions to finalise the details of the National Pension Agreement. Philips, Signify and the unions will decide what the future will be of the pension plans at Philips Pensioenfonds. Also, the Board of Trustees of Philips Pensioenfonds will need to make decisions. These steps will take time, so it might be a while before it becomes clear how you personally will be affected by the National Pension Agreement.
What role will the Board of Trustees play in the decisions about adopting the new pension system?
According to the memo describing the main principles for the practical details of the National Pension Agreement, employers and unions will make arrangements about their new pension plan (individual defined contribution plan or new pension contract), about proper compensation of a possible disadvantage, about entitlement conversion and about when the new pension system will be adopted. By law, employers will be obliged to record all these choices, and the considerations and calculations underlying them, in a transition plan. The pension fund's board will take that transition plan into advisement in its decision on accepting the contract. Pension funds will be obliged to draw up a plan of implementation for the transition, describing what preparations they will make and what actions they will take to administer the new pension plan. The implementation plan must support their ability to administer the new pension plan, bearing in mind a balanced consideration of the interests involved and the laws on equal treatment.
The initiative for making arrangements about the new pension plan, entitlement conversion and compensation formally rests with the employers and the unions. However, it will only be possible to administer that pension plan if the pension fund accepts the contract to administer it. The pension fund's Board of Trustees can only accept that contract if it believes that the interests of all the various groups of members have been given balanced consideration. Given the requirement that the pension fund's board must agree, in practice the employers and unions would do well to involve their pension funds in an early stage of their planning. This is of course also advisable with a view to efficiently drawing on the pension funds’ expertise. Philips and Signify have a long-standing tradition of involving Philips Pensioenfonds early on in the development of new pension plans, and will do so again in this case.
Is the situation at Philips Pensioenfonds comparable to the situation at other pension funds?
The situation at Philips Pensioenfonds is different from many other pension funds in two respects. Firstly, Philips Pensioenfonds has a somewhat higher funding ratio that many other pension funds, which gives it a buffer. Secondly, a relatively high proportion of Philips Pensioenfonds’s members are already drawing their pensions. Both these points could be relevant in the discussions (both among the Board of Trustees and with Philips, Signify and the unions) about issues such as entitlement conversion, compensation and the size and form of the solidarity buffer (when opting for the new pension contract and not for an individual defined contribution plan), and will therefore be expressly addressed in those discussions. It will be very important to consider all the relevant facts and circumstances in relation to each other. Only once it is decided precisely how the pension plan will be given shape and financed can we calculate how it could impact the various groups of members and assess whether everything is balanced.
Will the pension plans of Philips and Signify remain unchanged until the new pension system comes into effect?
The existing pension arrangements between Philips and Signify on the one hand and the unions on the other expire on 1 January 2022. During the period ahead, the companies and the unions will make arrangements about the pension plans beyond 1 January 2022. The Philips Pensioenfonds Board of Trustees consider the chance unlikely that we will be able to transition to the new pension system by then, new pension arrangements will probably be adopted for the period from 1 January 2022 until the date when the new pension system comes into effect (1 January 2026 at the latest). Those new arrangements will still fall under the current pension system. Precisely what those arrangements will be is of course still unclear. However, if it is practicable and legally possible to transition to the new pension system at 1 January 2022, and if Philips, Signify and the unions want to do so, the timing of the transition will coincide with the date when the new pension arrangements come into effect, which will then immediately fall under the new pension system.
Will there still be a pension for me if I live longer than expected?
On the retirement date, the annual pension is determined, among other things, on the basis of life expectancy. This concerns the annual pension that someone receives from his or her own pension pot. That would mean that the pension pot is empty as soon as a participant has reached the expected age of death. If a participant becomes older than was expected in advance, this participant would no longer receive any pension from that moment on. That is of course not the intention.
The Pension Agreement stipulates that this so-called longevity risk is covered. In this way there is also pension income if someone gets older than expected. Whether the longevity risk is fully covered depends on its further elaboration. The legislator will have to determine in the coming period exactly how this will be arranged. The pension pot of participants who die earlier than expected will probably be divided among the participants who live longer than expected. And part of the so-called solidarity reserve may also be used to cover the longevity risk.
The survivor's pension is hardly mentioned in the Pension Agreement. It is therefore not known what the situation is for a surviving relative who lives longer than expected. However, it may be expected that the longevity risk for a surviving relative will also be (largely) covered.