Overhaul of the pension system

Overhaul of the pension system
The pension industryDe
is being
nieuwereformed.
ZiektewetThe
en state
bijbehorende
pension wijzigingen van de
age and the fiscal standard
WIA hebben
pension
grote
retirement
gevolgen
age
voor
are werkgevers
rising
die veel met
to 67. At the same time,
tijdelijke
the Financial
krachtenAssessment
werken. Hoe
Framework
hoger het verzuim, hoe
for Pension Funds is also
meerbeing
premie
revised.
u straks
All betaalt.
these changes
Ook voor
in u geldt dat het belegislation and regulation
lang van
willverzuimimpact on
enorganisations
schadelastbeheersing
and
nu groter is
their employees. Employers
dan ooit.
will
Hoe
have
staat
to uadapt
ervoor?
their
Hoe
pension
kunt u uw risico’s het
schemes in line with hoofd
the changes.
bieden?Aon
Goed
Hewitt
voorbereid
sets outzijn is belangrijk. Aon Hethe main developments
wittand
zet alle
outlines
belangrijke
problem-solving
ontwikkelingen op een rij en biedt
approaches, so that you
u een
can
handreiking
take the steps
om required.
risico’s boven tafel te krijgen. Zodat
u die maatregelen kunt treffen die nodig zijn om slim in te
spelen op alle veranderingen.
White
Whitepaper
Paper
Augustus
April
20132012
Contents:
1 On the eve of ...
3
2 An overview of the changes
3
State pension age to increase
3
Standard pension retirement age to increase
4
Revision of Financial Assessment Framework for Pension Funds
5
3 What does this mean for you?
7
Consequences
7
4 Problem-solving approaches
8
Free choice of standard pension retirement age
8
Defined benefit pension schemes
Defined contribution pension schemes
8
10
5 Aon’s vision
11
Complete overview
11
What can you do?
11
Aon’s recommendations
11
Contact12
About Aon (Hewitt)
2 | White Paper: Reform of the pension system | April 2013
12
1
On the eve of ...
Old is poor
‘Old age’ used to be synonymous with ‘poverty’. Because if you weren’t working, you had no income. In
an agricultural society, the elderly used to live with the younger generations and were looked after. However, the situation was different in urban areas where the elderly usually depended on charity. This did not
change until the mid-19th century. With the introduction of the Poverty Act in 1854, the government took
on responsibility for care for the poor.
By the end of the 19th century, some employers were beginning to feel similarly responsible. Take one
blanket manufacturer in Leiden. In 1897, he paid out three guilders a week to his former employees. It was
around this time that more and more employers began to realise the need for change. They introduced a
system of industry pension funds, whereby they withheld part of their employees’ wages in order to pay
the money out once the employee had reached a certain age.
The General Old Age Pensions Act and pension
There were increasing calls for the government to ensure that people could enjoy their old age. The solution came in 1947: the introduction of the Old Age Pensions (Emergency Provisions) Act by Social Affairs minister at the time, Willem Drees. This was followed in 1959 by the official introduction of the AOW - the
General Old Age Pensions Act - by minister Ko Suurhoff, under the leadership of Drees, who by that time
had been elected Prime Minister.
While the Emergency Provisions Act had quite a few restrictions, the AOW provided for everyone who had
lived in the Netherlands from the age of 15 to 65 to receive a benefit. A supplement to this is a pension facility, via a collective or a defined contribution scheme. In 1938, around 8% of employees accrued extra
pension on top of the AOW; that percentage is now about 90%.
Major changes
And now, more than half a century after the introduction of ‘the crown jewel of the welfare state’, major
changes are in the pipeline. The state pension age is being increased for the first time and many changes
are being introduced with regard to pensions. The Financial Assessment Framework is being revised; accrual rates are being lowered and fiscal scales are being adjusted. We are on the eve of a number of major
changes which will have consequences for employers and employees alike.
2
An overview of the changes
State pension age to increase
The increase to the state pension age hardly comes as a surprise. The AOW - the so-called first pillar of
pension - has been the subject of discussion for a while. The state pension age has not been changed since
it was set at 65 in 1957.
Change is needed now, however, to respond to the significant increase in life expectancy. Figures from
Statistics Netherlands (CBS) show that men born in 1957 had a life expectancy of 71, while those born in
2011 had a life expectancy of 79. Women’s life expectancy increased from 74 to nearly 83 in the same period. This all means longer entitlement to an old-age pension and soaring government expenditure.
3 | White Paper: Reform of the pension system | April 2013
There is another reason to increase the state pension age. The ratio of working people (the premiumpaying share of the population) to pensioners (old-age pension recipients) has changed substantially and is
set to change even more in the near future due to the ageing of the population and decline in the number
of young people in the population. In other words: there are fewer working people in proportion to the
number of pensioners collecting an old-age pension. The ratio is currently four working people to one
non-working person. The picture in 30 years’ time will be very different: two working people to every one
non-working person.
In short, there is only one way to keep the state pension affordable in the future too: we must carry on
working longer. The VAP Act (Raising of the State Pension Age and Standard Pension Retirement Age Act)
has now been adopted by the government in The Hague. The state pension age will be gradually increased, starting in 2013. First by one month per year, later in larger increments. In 2019, the state pension
age will be 66 years, in 2023 it will be 67. From 2024 onwards this age will be linked to life expectancy.
In the Coalition Agreement, the VVD and PvdA parties have agreed that they will accelerate this process
even more. If parliament agrees, the state pension age will be 66 as early as 2018 and 67 in 2021.
Year
State pension age under current legislation
State pension age under coalition agreement
2013
65 + 1 month
65 + 1 month
2014
65 + 2 month
65 + 2 month
2015
65 + 3 month
65 + 3 month
2016
65 + 5 month
65 + 6 month
2017
65 + 7 month
65 + 9 month
2018
65 + 9 month
66
2019
66
66 + 4 month
2020
66 + 3 month
66 + 8 month
2021
66 + 6 month
67
2022
66 + 9 month
202367
Standard pension retirement age to increase
The VAP Act also has consequences for supplementary pensions in what is referred to as the second pillar.
Here too the issue of life expectancy plays a role: pensions have to be paid out for a longer period than
previously estimated. Furthermore premiums are currently so high - on average we already work one day a
week for our pension - that a further increase in premium charges threatens to become unaffordable.
The law also provides for the fiscal pension age to be increased, along with the state pension age. The
accrual of your pension receives favourable tax treatment. However, Inland Revenue does set limits to how
much pension you may accrue. As of 1 January 2014, the fiscal pension age will be raised to 67 years in one
go. The government is ‘forcing’ this by adjusting the fiscal frameworks, meaning that the maximum accrual
rates for a ‘pure’ pension scheme, a final salary or average salary scheme, will be reduced. These adjustments also have an impact on the maximum fiscal premium scales for defined contribution schemes.
4 | White Paper: Reform of the pension system | April 2013
Defined benefit
For so-called defined benefit pension schemes, where the benefit is set in advance, the maximum accrual
rates for average salary schemes will be lowered from 2.25% to 2.15% as of 1 January. A further cut to
1.75% of the pension base will probably follow on 1 January 2015. This has been agreed in the Coalition
Agreement and was recently incorporated in the Witteveen 2015 legislative proposal. This legislative
proposal - also referred to informally as the Witteveen framework - provides for limits on the tax-friendly
treatment of pension accrual in the Netherlands.
It is also expected that pension accrual with favourable tax treatment will then only be possible for
incomes of up to 100,000 euros. For final salary schemes, the law means a reduction of the maximum
accrual rate from 2.0% to 1.9% in 2014 and possibly a further reduction to 1.55% in 2015.
Defined contribution
From 1 January 2014, a different fiscal limit will also apply to the defined contribution schemes, whereby
the individual employee pays a premium for individual endowment insurance with a pension clause. In
other words, an adjustment of the Witteveen framework. The rise in the standard pension retirement age
to 67 and the corresponding reduction in pension accrual by 0.1% mean that virtually all defined contribution scales must be adjusted. New scales were therefore published at the end of 2012 showing the following changes:
• Net scales based on an average salary pension with 2.15% annual accrual (was previously 2.25%)
• Expansion of the scales to include the age bracket of 65 to 66
• Update of the mortality table
The new standard pension retirement age only applies to new pension agreements. From now on, these
will be calculated with reference to the new retirement age. However, the old agreements will also
continue to exist. In practice, that means that in future an employee have a pension with different
retirement dates: one part will start paying out from the age of 65, the other from the age of 67.
This implies a mismatch between the start date of the state pension on the one hand and the standard
pension retirement age on the other, even aside from the ultimate decision for a standard pension
retirement age of 65 or 67. In chapter 4 we return to the possibilities for repairing this and the advantages
and disadvantages inherent in the choices.
Reform of Financial Assessment Framework for Pension Funds
As stated, much more is changing in terms of pensions. Besides the increase in the state pension age and
standard pension retirement age, the new Financial Assessment Framework for Pension Funds (FTK) is
expected to be introduced on 1 January 2015. The FTK is part of the Pensions Act which lays down the legal
financial requirements for pension funds.
Minister Henk Kamp of Social Affairs and Employment (SZW) hopes the reform of the FTK will make
supplementary pensions “more transparent and better able to withstand financial shocks”, he says in a letter
to the Lower House. The new FTK stipulates among other things that funds must clearly communicate the
inancial risks and the consequences for the purchasing power of the pension. Participants are entitled to a
realistic picture, also in relation to whether the pension is fully indexed or not. The statutory framework
therefore ensures that the contracts take better account of the financing required for indexation.
5 | White Paper: Reform of the pension system | April 2013
Nominal or real contract
The government seemed to opt for a single comprehensive new assessment framework, with room for two
types of pension contract: the (existing) nominal contract and the (new) real contract. Because of the Social
Agreement concluded between the government and social partners, the exact details of the FTK are still
unclear.
To summarise, with the nominal contracts indexation is contingent on the particular pension fund’s financial
position. The fund can only use a reduction of accrued entitlements and benefits as a management instrument in the most extreme case. With the real contract, pension entitlements and benefits are automatically
indexed each year.
By means of an annual feasibility test, pension funds must demonstrate that the pension ambition promised is
realistic and feasible. The techniques of this test are based on the current continuity analysis. The outcomes
of this feasibility test form the basis for communication with participants on the purchasing power and risks
of their pension.
In calculating the costs of future indexation, funds may take into account part of the expected return on their
investments. Furthermore, with both nominal and real contracts, they may determine the funding ratios for
an average of 12 months. A more stable interest rate will be used for calculations for the longer term. The
government hopes this will prevent the need for drastic measures as the result of sudden fluctuations in the
funding ratio.
The Social Agreement
In April 2013, the government and social partners concluded a Social Agreement which also contains
agreements affecting the new regulations concerning pensions. The social partners want more stability in
the pension system. They argue that parties must be required to ‘incorporate’ the existing entitlements in
the new contract, which would be subject to clear ground rules monitored by De Nederlandsche Bank.
The social partners also want the possibilities for making the notional interest rate more stable to be
studied. They want to prevent the rigid separation between the nominal and real framework, which could
cause the stricter nominal contract to disappear. For the transitional year of 2014, the social partners want
additional measures to prevent a reduction of the nominal value of pensions and premium increases as a
result of policy regulations. The aim of this is to ‘get in lane’ y for the new contract as of 1 January 2015.
The details of these points must be finalised before 1 June 2013.
6 | White Paper: Reform of the pension system | April 2013
3
What does this mean for you?
Consequences
The changes in legislation and regulations in relation to pensions have a great impact on (large) organisations
and their employees. The rules laid down in The Hague may mean changes to the pension scheme.
Employers will at least have to determine whether their pension scheme is excessive. If so, they will have to
amend the scheme. However, the decision they make goes beyond simply amending the pension scheme.
This decision also has an impact on benefits under the Unemployment Insurance Act (WW) or Work and
Income (Capacity for Work) Act (WIA). After all, depending on the decision, there could be a case of
concurrence and therefore a reduction in benefit for the employee or former employee. Employers whose
employee pension schemes are administered by an insurer will also face administrative and contractual
restrictions from insurers.
Does the pension scheme fall within fiscal framework as of 1 January 2014?
Change to pension scheme
required
Amendment of pension scheme
with standard pension
retirement age of 65 maintained
Change to pension scheme
not fiscally required
Amendment of pension scheme with
increase to standard pension
retirement age (for example, 67)
Break with accrued
entitlements
Conversion of accrued
entitlements
But the changes also mean opportunities for employers. In the event of a possible change to the standard
pension retirement age, they can push down premium costs. There is also a certain ‘momentum’ for
discussing the pension scheme in a broader sense.
The changes and choices facing employers require knowledge and expertise on the new pension
legislation and regulations. Because there are also risks. The pension premium ‘freed up’ could become
the subject of negotiations on employment conditions and could be used for other purposes, such as
higher salaries for example. For employees, the new legislation and regulations mean that they are being
encouraged by numerous fiscal measures to continue working longer.
7 | White Paper: Reform of the pension system | April 2013
4
Problem-solving approaches
Free choice of standard pension retirement age
The rise in the state pension age - at whatever pace this occurs - is a political decision and therefore a
reality. The rise of the standard pension retirement age leaves more scope for individual choices. As stated:
the new standard pension retirement age of 67 only applies to new pension agreements. This implies a
mismatch between the start date of the state pension on the one hand and the standard pension
retirement age on the other. Employers are free to decide how they deal with that.
Defined benefit pension schemes
For pension schemes whereby the benefit is set in advance – these tend to be the average and final salary
schemes - the following possibilities seem the most realistic:
1)
Maintaining the standard pension retirement age of 65
2)
Increasing the standard pension retirement age to 67 from 1 January 2014, whereby the pension
entitlements accrued until 31 December 2013 continue to be based on a standard pension
retirement age of 65.
3)
Increasing the standard pension retirement age to 67 from 1 January 2014, whereby the pension
entitlements accrued until 31 December 2013 are collectively recalculated on the basis of a
standard pension retirement age of 67.
Maintaining the standard pension retirement age
Based on the current regulations, it is possible to maintain the standard pension retirement age of 65. An
important precondition applies however that the new pension scheme as a whole must fall within the new
fiscal frameworks. Maintaining the standard pension retirement age of 65 means that the earlier starting
age will have to be compensated. This can be done by using a lower rate than the maximum accrual rate
permitted under fiscal regulations. Increasing the offset to above the minimal fiscal offset is another option.
However, an important point of attention is that the fiscal limits cited earlier pertain to the situation as of 1
January 2014. The Coalition Agreement stipulates that the fiscal limits - and by extension the accrual rates will probably be reduced even further from 2015. This has since been included in the Witteveen 2015 legislative proposal.
Advantages:
• No major changes in terms of administration
• No conversion of accrued pensions required
• Limited changes to legal documents
• Communication with participants relatively simple
• Ties in well with accrued pre-pension
• No conversion of accrued entitlements required
Disadvantages:
• Requirement to continue working in order to postpone pension after age of 65
• Concurrence with social security benefits and therefore reduction of the benefits
• Mismatch between state pension age and possible dismissal age
• Termination of risk cover at age of 65 is at odds with WGBL (Equal Treatment Act)
• This is a temporary solution; changes may once again be needed as of 1 January 2015
8 | White Paper: Reform of the pension system | April 2013
Increasing standard pension retirement age to 67, accrued entitlements remain
It is also possible to increase the standard pension retirement age to 67. In that case, from 1 January 2014
the accrual will be based on retirement at 67.
Advantages:
• Ties in with acceptable fiscal standard pension retirement age from 2014
• More fiscal latitude based on accrual rates
• More motivation among employees to continue working longer
• Requirement to continue working only for entitlements accrued in the past (unless conversion occurs)
• Concurrence with benefits on grounds of social facilities only for entitlements accrued in the past
(unless conversion occurs)
Disadvantages:
• More extensive changes to legal documents
• Communication with participants more difficult due to the difference between accrued and new entitlements. However, the Pensions Act does not prohibit communicating about a single pension age
• Requires changes to administration system, high one-off costs
• Mismatch with state pension age remains
Increasing standard pension retirement age to 67, accrued entitlements converted
A third option is to convert the entitlements already accrued with a retirement age of 65 for everyone
collectively to an entitlement at 67. This would result in a situation similar to the previous situation. According
to state secretary for Social Affairs and Employment, Jetta Klijnsma, a collective conversion would be seen as a
collective value transfer on grounds of the Pensions Act.
Advantages:
• Communication with participants is simpler
• Participants are better able to assess their own pension situation (a single retirement date)
• Future administration is simpler and therefore cheaper
• No concurrence of pension and social security benefits up to state pension age
Disadvantages:
• Participants may object to the collective transfer of their pension entitlements. Besides the active
participants, the occupationally disabled participants and participants who are granted a waiver
of premium must also be taken into account
• This may be neutral for the participant at the moment of conversion, but in the future a difference
could arise in the event of any trade-in in order to have benefit payments start on the (earlier)
original start date. After all, the future rates for flexibilisation have not yet been set
• High one-off transition costs
The changing laws and regulations also prompt questions concerning other groups besides working
people and pensioners. These include:
• Participants who have taken pre-pension
• Participants with an early retirement benefit
• Participants with an occupational disability pension or Surviving Dependants Act shortfall pension
(temporary partner’s pension) which has started payment
9 | White Paper: Reform of the pension system | April 2013
The benefit they receive will stop on the first day of the month in which they turn 65 and no money is
reserved to continue this benefit until the new state pension age. This will result in a temporary fall in income.
Defined contribution pension schemes
The new regulations also have consequences for the defined contribution schemes, whereby the individual
employee pays a premium for individual endowment insurance with a pension clause. As described in
chapter 2, the changes in the fiscal framework also have an impact on the defined contribution scales.
At the end of 2012, new scales were published based on an average salary pension with 2.15% annual
accrual. The scales were also expanded to include an age bracket for 65 to 66 and the mortality tables
were updated.
Only ‘old’ scales that remain below the ‘new’ scales for all age brackets can still be used in 2014. The
defined contribution may amount to a maximum 86% of the ‘old’ scale, unless there is compensation via
the offset or the pensionable salary. The Tax and Customs Administration tests whether there is any excess
with respect to the fiscal regulations. Maintaining the ‘old’ scales may actually be at odds with the equal
treatment legislation.
Besides the regular 4% scales, scales are also available which assume a notional interest rate of 3%. A 3%
scale has higher maximum accrual rates than a 4% scale and can therefore be a solution for compensating
the lower pension accrual. A condition for using a 3% scale is that the pension promise must remain within
the fiscal limits. The conditions for this test have been relaxed since 2013. A test is only required if certain
so-called ‘events’ occur, such as a transfer of value, termination of the partner relationship or the start of
payment of the pension. The current salary may subsequently be used as the basis for this test (final salary
test) and the historical salary no longer needs to be considered. Any surplus reverts to the pension
administrator.
10 | White Paper: Reform of the pension system | April 2013
5
Aon’s vision
Complete overview
The coming period will be characterised by major changes, which could occur in rapid succession. The fiscal
possibilities will become even more limited and the Social Agreement will prompt individual legislative
proposals. These could all have consequences for your pension scheme.
Aon monitors the entire arena. It has the knowledge required to assist with these issues and decisions. Aon
also has the overview that most insurers and pension administrators are lacking. Thanks to this position, Aon
has important information on the current state of affairs at the insurers: who can offer what when it comes to
the changes?
In order to keep its overview up to date, Aon uses World Class Brooking, an extensive database containing all
the terms and conditions and offers from the insurers. Aon’s client consultants also closely monitor the market
and current legislation and regulations.
What can you do?
The rise in the state pension age and standard pension retirement age and other legislative amendments
have an impact on businesses. As an employer, you are faced with deciding how to deal with the changes.
This can be done on 3 ‘levels’:
1) Focus on legal introduction
You only make the necessary changes.
2) Recalibration of pension scheme
You undertake a fundamental recalibration of the starting points of your pension scheme, such as the
substantive promises, premium development and risk allocation.
3) Recalibration of pension scheme
You use the increase in the pension age and the ageing of the population as an opportunity to not only
tackle the pension dossier, but to view this in terms of your personnel policy as a whole and the related
employment conditions. Continuing working longer is not just a pension issue.
Aon’s recommendations
Aon advises that you take stock of all the changes you are facing in good time. This means you can take
timely action too. The following steps can be taken in this respect:
• Take stock of whether your pension scheme is excessive
• If so, chart out all the options, including their advantages and disadvantages. Take into account the
changes taking effect as of 1 January 2014, as well as the political plans for 1 January 2015.
• Obtain insight into what solutions your insurer or pension administrator can offer
• Start the process of developing a new pension scheme on time
• Use expert support in talks with your insurer or pension administrator
11 | White Paper: Reform of the pension system | April 2013
Contact
Drs. F.H.P. Driessen
Frank Driessen is Chief Commercial Officer (CCO) of Aon Hewitt Nederland. He is
responsible for pension and investment consultancy and sales in the market for
pension funds, international companies and the SME sector. As Chief Actuary and
Principal Client Consultant, he also advises clients on designing, implementing
and financing pension schemes, de-risking pension risks, M&A processes and
negotiations with insurers.
Frank Driessen M +31 (0)6 129 918 85
E
[email protected]
www.aon.nl
Over Aon (Hewitt)
Aon Hewitt is worldwide market leader in solutions for Human Resources Management.
The company advises organisations on solving complex issues in the areas of employment
conditions, talent management and the related financial challenges. Aon Hewitt designs,
implements, communicates and manages a wide range of solutions relating to human
capital, pensions, investment management, healthcare, remuneration, insurance and talent
management. Aon Hewitt thus boosts the return on organisations’ most important capital:
their employees. The company employs over 29,000 professionals in 90 countries.
Aon Hewitt is part of insurance broker and risk adviser Aon plc, London, UK. The worldwide
Aon network includes approximately 600 offices in over 120 countries and has more than
62,000 employees. More information: www.aonhewitt.com.
© 2013 Aon Hewitt
All rights reserved. No part of this report may be reproduced, stored in an automated data
file or published, in any form or manner whatsoever, electronically, mechanically, by
photocopying, recording or any other manner, without the advance written permission of
Aon Hewitt.
7975-ENG-WhiteP-V1
First edition, April 2013.