The Wtp: Urgent Advice to Employers
The Future Pensions Act (Wtp) has been in effect since July 1 of this year. The main difference from the current pension system is the introduction of the defined contribution (DC) scheme. There no longer is an accrual of pension entitlements (defined benefit), but only premium contributions.
The starting point under the WTP is that in the future the amount of the pension benefit will be variable. It will depend on the premiums paid, and the investment returns earned on them, even after the retirement pension begins. The pension system will also be more personalized - participants will have their own pension savings, at least during the accrual phase.
Another difference under the Wtp: for all participants, whether they are 18 or 60, the premium to be deposited is now the same. The graduated premium increasing with age disappears. Unless the employer already has an age-related defined contribution plan. That may then be maintained for existing employees.
With a series of interviews with pension experts, elipsLife already analyzed the pluses and minuses of the Wtp. A major gain of the Wtp, according to the specialists, is that pension funds are no longer obligated to build up large buffers. As a result, pensions can be increased faster and retain their value.
There is also criticism. One of the objectives of the Wtp was to make pensions more transparent and simpler for participants, also given the changed labor market. That has failed miserably. It instead became far more complex.
The transition phase has unprecedented challenges. Firstly, for pension funds. In the coming years, they will have to switch from a DB scheme to a DC scheme. The 'opt-in' - the term used for transferring the value of accrued pension entitlements to the new pension system - is extremely complicated.
Pension assets must be distributed to all participants. Not only active employees, but also ‘sleepers’ (former employees) and retirees. Balance is the magic word here. All participants are entitled to a proportional bite of the pie to be distributed. The financial stakes, as a result, are high. That entails a great responsibility for pension fund administrators.
Another aspect is that implementing organizations face tight timelines and limited capacity. January 1, 2028 seems far away, but is very close given all the complexities. This generates considerable risks.
The reputation of pension funds is at stake. The transition takes place only once and if it turns out later that mistakes were made in this process, it can have major consequences. It undermines participants' confidence in the pension system.
A tough job for employers
The WTP seems to have been written primarily to solve problems of (industry) pension funds, such as maintaining buffers and abolishing the average contribution. But even for employers who already have a DC plan, the transition phase will be a tough one. There are quite a few considerations to be made.
These employers are now required to implement a flat tiered pension accrual rate for at least the new employees. And that involves difficult choices, such as the type of pension plan, the amount of contribution, and the issue of compensation.
It also presents employers with the dilemma of whether to maintain the age-dependent graduated scale for existing employees or switch to the flat graduated scale for all employees.
If the employer chooses the latter, it will have to compensate the employees who are adversely affected. This can be done in two ways. In the form of a higher pension premium for a period of up to ten years. This leads to substantially higher pension costs during this period. The alternative is compensation in the form of higher wages. The increased premiums can then be spread over a longer period.
If the employer chooses to maintain the age-dependent graduated scale for existing employees, this also has consequences for the labor market position. Employees of equal age will then have a different contribution for retirement. As a result, the labor mobility of older workers would become severely restricted. The exact opposite is true for young people. This is something employers should think about carefully with their advisor.
Solidarity versus flexibility
Employers will also have to choose between two pension plans: the solidarity-based or the flexible option. In a solidarity-based contribution plan, there is a single age-dependent investment policy and members share the risks. This scheme, run by pension funds, offers fewer individual choices. The solidarity-based nature aims to avoid unpleasant surprises in the benefit phase. This should lead to a more stable pension.
In a flexible contribution plan, participants have an individual pension pot and can adjust the parameters if they so wish. They can then decide how they want to invest and how much risk they want to take.
When choosing between these two options, employers will need to work with their pension advisor to determine the risk attitude of their employees and which plan best suits that attitude. Several variables are important here. These include income and education, but family composition and financial literacy also play a role.
If the employer opts for the flexible option, proper guidance is crucial. This is also where the employer's duty of care comes into play. It is essential for the employer to work with the advisor to ensure that employees are assisted in making appropriate choices.
Focus on partner's pension
Employers must also make choices for the partner's pension. Under the Wtp, there is a fixed percentage of the annual salary (maximum 50 percent) as a partner's pension instead of an amount that depends on the number of (future) years of service.
The employer should work with the advisor to determine what an appropriate percentage is. In addition, other choices can be made. What coverage the employer would want to offer its employees: only a lifelong partner's pension or also a Surviving Dependents Act (ANW) gap pension or a lump sum death benefit of, say, twice the annual salary? It would be prudent to explore with an advisor what the most appropriate solution for employees would be.
Another important but illogical change under the Wtp is that in the event of an employee's death before the state pension age, the accumulated pension capital may no longer be used to optimize the partner's pension but is to be distributed among the other participants.
From the perspective of the solidarity-based scheme, this is still somewhat understandable. After all, the solidarity-based character implies that various risks can be shared collectively.
From the perspective of the flexible variant - which focuses on the individual - this feels unfair to participants. Suppose your partner saved half a million in pension capital. If he or she dies at age 65, that half a million is gone. That is difficult to explain to a survivor and does not do justice to the individual nature of the flexible arrangement.
Do not wait for amended legislation
The WTP in its current form is not yet complete. This means that several amendments are expected to follow. The urgent advice to employers is nevertheless to get to work quickly and decisively on the transition to the Wtp.
Once again: January 1, 2028, seems far away, but the transition is a labor-intensive and time-consuming process. This is especially true for employers with their own pension fund. But for all employers, the required capacity is limited. This applies to capacity of both pension administrators and pension consultants.
Elections exciting for the Wtp
The election for the House of Representatives, which takes place a day after this edition of Management Scope is on the street, will also be exciting for the Wtp. Several parties, such as BBB and PVV, are against the Wtp. Other parties, such as NSC, are in favor of major changes to the law.
Should NSC, BBB or PVV join a new government, the Wtp in its current form could be in jeopardy.
It is doubtful whether it is in the interest of the participant to have major changes to it at this stage. It would, in any case, most certainly not boost confidence in the pension system.
Essay by Joost de Visser, Senior Sales Consultant at elipsLife. Published in Management Scope 10 2023.