The Three-Pronged Approach Called Partner Pension Becomes A Complicated Puzzle
In the media, there is a suggestion that the partner pension under the new Future Pensions Act (WTP) will be taken care of: it would be 50 percent of the deceased employee’s last earned annual salary. However, the likelihood of this being the final situation is low as it is expensive and therefore unrealistic. A percentage of 20 to 30 percent is more plausible. Employers who fail to communicate sufficiently with their employees about this may face disappointment, misunderstanding, and difficult questions from the surviving relatives in the event of an employee’s death.
Core of the change
First, a brief overview of the main changes. The partner- and orphan pension that a partner and/or child stand to receive when an employee dies will be a fixed percentage of the annual salary; the relationship to the service time will be eliminated. Under the WTP, it becomes a pure risk insurance for the partner- and orphan pension. There will no longer be an ‘accumulated’ surviving relatives’ pension. Also, in the event of an employee’s death before the pension age, the accumulated pension capital under the WTP will be distributed among the other participants in the pension scheme. This means that agreements need to be made about providing adequate coverage for the surviving relatives if an employee dies before the pension age and what a desirable and affordable arrangement for the employer would be. It is expected that many employers will want to transition to the new pension system in a cost-neutral manner. Decisions regarding the surviving relatives’ pension will also have consequences for the choices made about building up the retirement pension, and vice versa.
New choices
For employers who are obligated to be part of a sectoral pension fund, there is little room for choice. The (minimum) level of the pension scheme is determined by the social partners and subsequently fixed in the collective labour agreement (CAO). The employer’s role is limited in this case. However, for employers who have arranged the pension scheme with a company pension fund, a premium pension institution (PPI), or a pension insurer, the employer, together with the pension advisor and the Works Council (WC), determines the content of the pension scheme. The provisions for surviving relatives are a crucial part of this. The level of the provisions should be based on the needs of the surviving relatives, taking various factors into account: the employer’s approach to being a good employer, as well as the financial situation and financial literacy of individual employees. Moreover, existing and new rights can coexist. Not everyone understands the often-technical interpretations of the new pension system, which are difficult to comprehend and is subject to much nonsense and misinformation.
Duty of care
It is of the utmost importance for employers to invest in providing good guidance to employees in making choices. On the one hand, this ensures the employer’s duty of care, especially when employees are afforded a wide freedom of choice. The financial impact for the employer can be enormous if they fail to provide adequate guidance. On the other hand, the supervisory authorities, DNB (Dutch Central Bank) and AFM (Financial Markets Authority), will closely monitor whether the employer and their pension advisor meet the prescribed communication requirements in the compulsory transition plan to the WTP. The employer is thus exposed to significant risks.
Three main options
A straightforward model for employers would be to opt for a basic provision for surviving relatives, with the option for the employee to voluntarily take out additional insurance. The employer can adjust three factors to achieve the desired level of coverage for the surviving partner in the basic provision: the partner pension (a lifelong payment as a percentage of the deceased partner’s annual salary), a temporary surviving relatives bridging pension until the start of the retirement pension (the so-called ‘Anw-hiaatpensioen’ amounting to approximately €19,000 per year), and a one-time payment through a separate life insurance policy.
Complicated puzzle
This three-pronged approach may seem simple, but it becomes a complicated puzzle, even if only due to the difference in costs for the three different coverage options. A lifelong partner pension is much more expensive than an ‘Anw-hiaatpensioen’. A life insurance policy to the worth of one time the annual salary is much cheaper than an ‘Anw-hiaatpensioen’ insurance.
To make the employer’s choice easier, many pension providers under the WTP also offer voluntary surviving relatives arrangements. In addition to a basic provision, the employer can then offer both voluntary surviving relatives pension and voluntary ‘Anw-hiaatpensioen’ within the fiscal limits. This allows the employer to set up a hybrid model with mandatory and voluntary arrangements. Even in this case, proper guidance for the employee is essential. Fortunately, more and more pension providers offer good apps or online environments to clarify the consequences of individual choices to employees.
Cost factor
The overall cost of the pension scheme also plays a role. If the employer opts for a generous provision for surviving relatives, it may come at the expense of the available pension premiums for the retirement pensions of employees themselves when transitioning to the WTP in a cost-neutral manner. A small minority - as relatively few people die before reaching the AOW (pension age - ‘Algemene Ouderdomswet’) age - would benefit from a generous basic provision; the vast majority would receive a lower retirement pension. Is that desirable and fair?
Conversely, the costs for a surviving relatives arrangement are relatively low compared to the available premium for pension accrual. A much better provision for surviving relatives can be achieved with a limited increase in costs.
No one-size-fits-all
What additional insurance employees want depends on individual circumstances. Moreover, preferences and expectations can change over time. At present dual-income earners are prevalent, although not everyone is financially independent if a substantial portion of the partner’s income disappears due to their passing away.
When the partner passes away, the younger the employee, the greater the likelihood of the remaining partner finding a new relationship. In such cases, an extensive lifelong partner pension may not be necessary. A one-time death benefit and/or an ‘Anw-hiaatuitkering’ up to the official retirement age may be more suitable for the financial needs of the surviving partner. Conversely, this may be different for older partners without paid work who are approaching their official retirement age. This group probably needs more security in the form of a lifelong payment than an ‘Anw-hiaatpensioen’ up to the official retirement age.
In short, the one-size-fits-all principle does not apply. As an employer, you can choose for a broad common denominator with flexibility and freedom of choice for employees. It will be challenging for employers to make a balanced choice which would be optimal for all employees.
Warning
Begin as soon as possible to inventorize and analyse the consequences for both the employer and employees of transitioning to a pension contract according to the WTP. This first step can be undertaken with a pension advisor and social partners. The second step is to establish good guidance for employees, crucial for a successful transition to a new pension scheme under the WTP. A word of caution here: January 1, 2028, may seem distant, but considering the steps that need to be taken in the transition to the WTP, it is not that distant at all. The number of pension advisors and their capacity is limited. It is therefore essential for employers to consult with a pension advisor timeously.
Essay by Joost de Visser, Senior Sales Consultant at elipsLife. Published in Management Scope 07 2023.