Theo Gommer on the New Pension System: ‘It Is Still Too Impersonal’
After at least 15 years of debate, this year will (probably) finally see the results implemented: the Dutch pension system will be shaken up with the introduction of the Future Pensions Act (WTP). The main change is the broad introduction of the defined contribution (DC) scheme, where the defining feature is described premiums. Employees will now know what their pension contribution is, but only at the date of retirement exactly what the pension benefit will be. From the presumed effective date of the WTP (July 1, 2023), pension providers will have more than four years to adjust pension plans. That date also marks the start of the transition period, during which employers and pension providers switch from the existing pension plans to the new ones. If an employer in future enters a new pension plan, the plan must immediately comply with the new WTP. For existing pension plans, an employer must have switched to a pension plan that complies with the WTP by January 1, 2027, at the latest.
Tackling the pension system was inevitable. The Netherlands is aging; the labor force is shrinking, while the number of retirees is growing. This is a risk scenario especially for companies with defined benefit (DB) plans. Unlike the DC plan, the pensioner receives a pension benefit at a certain fixed ratio to the last earned salary or - slightly less florid - the average salary. With increasing ‘gray pressure’, it is becoming increasingly difficult for companies’ pension funds to meet their pension obligations. Especially with the low interest rates of recent years, which meant that pension fund returns constantly threatened to fall short of their obligations - and the retirement age threatened to be raised (even) further, workers’ premiums threatened to increase, and employers threatened to be saddled with top-up obligations. The further disappearance of final and average pay plans was already in the air. As people no longer work for the same employer for forty years and the number of self-employed workers keeps increasing, the average contribution system also needed to be changed.
The pension system could also be more transparent - read: not just understandable for insiders. In addition, it was high time for a more personalized pension plan, with more freedom of choice for individual employees, as befits a time when the variation in employment relationships is increasing. In conversation with Stefan Duran of life insurer elipsLife, pension lawyer Theo Gommer explains the new scheme.
Is the WTP so much better than the old arrangement?
‘The glass is half full, and that is better than an empty glass. The WTP solves some long-standing problems. For example, discussions about the interest rate that is so important to determine the coverage ratio of pension funds - even when the investment returns of the pension funds are extremely good! - will soon be a thing of the past. The same goes for discussions about when pension funds should cut benefits or on the contrary be indexing: within a defined contribution system, or DC system, these are no longer relevant.
The introduction of the WTP is also a first step toward further personalization of pensions - I prefer to use the word personalization rather than the much-used individualization, because that sounds so antisocial. Personalization in the sense that a person’s pension will soon depend more heavily on his or her pension fund’s returns and life expectancy, and where each participant will have more financial leeway to use his or her pension benefits: for example, those who retire will be allowed to withdraw up to 10 percent of their accrued assets in a single withdrawal.’
Why is the glass then only half full?
‘On the other hand, I do have some criticism. The WTP is also intended to make a good pension possible for all working people, but it is too impersonal for that. Why not give pension members more options regarding what happens to their deposited contributions? So that they have more opportunities to choose investments with a certain level of risk, for example? Or the possibility of putting their money in green and responsible funds?
Other options, such as taking early retirement for a home mortgage or taking a sabbatical are also not yet available. Hopefully in the future it will be. We must move on after this transition, towards WTP 2.0 in which we have much more freedom of choice in terms of how we build up pension and use the money.’
Under current law, the pension premium increases with the age of participants. This rising graduated premium will disappear: in the new system, an age-independent premium will apply. Existing participants will be allowed to keep the rising graduated premium under a transitional arrangement. How do you think will employers who are already in a DC environment deal with the age-dependent graduated scales?
‘An age-dependent graduated scale is not that bad. Someone at 25 years does not have to pay 15 or 20 percent premium, let alone 25 percent. That will not work. At that age you want to buy your own house, must pay off a student debt, want to work four days and still live luxuriously. That does not fit with a 25 percent pension contribution. Anyway, the age-dependent graduated scale will disappear and make way for a flat rate. I expect that most pension funds - especially those with many younger members - will opt for a low mandatory flat rate premium of perhaps 15 percent. In addition, people will then be able to save up to 30 percent, either within pensions or annuities. A good development, as far as I am concerned, since people will still have a considerable amount of freedom to determine what they set aside for retirement. Those who are young maybe a little less, those who are older or have just received a bonus maybe a little more.
A flat rate, as opposed to the graduated scheme, is also a good solution given the European obligation to treat employees equally. I think it creates simplification and the employer also benefits. The technical pension advice will disappear and many discussions can be avoided.’
Under the WTP, the risks to pension participants will increase. Do you expect claims from participants against the pension funds that ‘transfer’ their participants from the old to the new scheme?
‘No. I think most working people will show solidarity with each other and settle for a balanced distribution, rather than necessarily contesting everything through complicated procedures. I also doubt that this issue will get that much admissibility from the European Court. In the rest of Europe, people have always been jealous of our large pension pots and would be extremely surprised if claims came due to abolition of defined benefit or DB schemes. What is the issue, would be the reaction.
Rather, I expect claims about the compensation arrangements for pension plans whose participants are moving to a flat rate plan, especially when they previously had increasing graduated contributions. Not all workers will be satisfied with the compensation. For example, what if a pension fund achieves exceptionally good investment results? Should the excess profits then go into a solidarity reserve so that all participants can benefit, or should they be used to compensate a select few? Surely these kinds of questions will have to be tackled. Although I do not expect mass claims here either, if only because that would require setting up a claims foundation and people contributing to it. I do not see them doing that anytime soon. These are not usury policies; it will be very difficult to mobilize people. Quite a hassle, and that for a process that can take years and where the potential returns are very limited.’
What can an employer do to make the transition to the WTP more attractive to employees?
‘In the first place, offer employees the possibilities offered by the WTP to build up their own pension, albeit with some standardization; ie, the low flat rate as well as saving a fixed percentage of the salary. I do think that a certain amount of standardization is needed in this regard, because not all employees will necessarily immerse themselves into their retirement planning. That brings me to the following: the importance of good financial guidance. Since retirement risks are transferred to the employee, it would be wise for the employer to pay sufficient attention to the guidance provided. Instead of being nonchalant and letting employees figure it out for themselves, employers should help their employees deal with the responsibility given to them under the WTP. Good education is essential in this regard: at least then an employee will have some idea what he or she is choosing for, even if he or she is not a financial expert.
Unfortunately, such information is lacking. In practice, it appears that younger companies often pay no attention to pension issues, while in established companies communication is still determined by older people who are not good at using apps and other modern means which can appeal to young people.’
The scheme for the survivor’s pension is also changing. There will no longer be a distinction between married couples and cohabitants. In the event of death before the retirement date, the partner’s pension may not exceed 50 percent of the last-earned salary and will therefore no longer depend on the length of service with the employer. Moreover, this partner’s pension may only be insured on a risk basis and no longer on an accrual basis and will lapse soon after a person leaves employment or retires. These risk premiums for the survivor’s pension are paid by the employer, in addition to the available premium for the old-age pension and partner’s pension that takes effect upon death after the retirement date. What do you think about that?
‘Standardizing married and cohabiting couples is only right. That standardization fits into a modern society in which the difference between married and unmarried cohabitation has all but disappeared. So hardly anyone can be opposed to that, except a Christian employer who would prefer only married people to receive a partner’s pension. He or she will have to accept that he or she must include unmarried people, or not promise a partner’s pension at all - because that is also possible. The partner’s pension is not mandatory - it is presumed to be, but that is a misconception.
I also unreservedly welcome the fact that the partner’s pension will be a risk-based pension. After all, we live in a two-earner society. Therefore, I find it curious anyway that an employer still considers a partner’s pension. Why would an employer do that? Surely the partner does not also work for the employer in question and he or she can protect him or herself against an unwanted drop in income?
On the other hand, I understand that an employer wants to be social and therefore offers a partner’s pension anyway. But if that employee moves to the neighbor because he can earn more there, or becomes self-employed, why should the old employer still contribute to that partner’s pension? Of course, it is unpleasant if your partner dies, and you do not receive a partner’s pension. But you are then entitled to the General Surviving Relatives Act, or ANW. Moreover, and that brings me back to the observation that we live in a two-earner society: a survivor can find employment again, if this is needed. Even women who have been homemakers for years: it is no longer the case that as a woman you cannot get a job after age 50 if your children are out of the house. Chances are that woman has always had a part-time job and can now work full-time.
I think many employers will look critically at the partner’s pension. Sometimes the partner pension will be cut first because of cost. Also, employers will be apprehensive about the risks of having to continue the partner’s pension after someone has driven out of employment. This is especially true in the staffing industry, where the employer is sometimes responsible for a former employee’s partner’s pension for a few more months. If an employer does not want to run this risk, it will probably not offer a partner’s pension. I also expect standardization; many employers will opt for a standard partner’s pension of 25 percent. If the employee wants more, he will have to provide that himself by buying extra insurance. Or not, of course. Again, I hope employers will provide the right information so that employees can make an informed choice. If the choice is theirs, they need to be in the position to make a good decision.’
Finally, what do you see as the biggest challenges to a smooth implementation of the WTP?
‘It seems that many pension funds are not in possession of correct data, while that is where it stands or falls. Pension funds need to be very careful and get their data in order. Another frequently mentioned problem is that administration organizations would not have sufficient capacity for the whole transition, especially to get IT systems in order. If that is indeed the case, they need to work hard. I do not think there is any excuse for lagging. If necessary, they should hire IT specialists from Ukraine or train people on an accelerated basis to get their affairs in order. Employers and employees pay premiums through them for a reason; they should be able to trust that the deferred wage will be paid as agreed.’
This interview was published in Management Scope 05 2023.
This article was last changed on 23-05-2023