Pension Specialist Roos van der Velden: 'The Real Problem Is Not Being Addressed'

What are the primary consequences for employers with an introduction of the Future Pensions Act (WTP)?
‘The WTP is primarily aimed at pension funds. The WTP may perhaps solve the problems they are struggling with. Whether it will work out so well for participants remains to be seen. Young people will have to contribute less to old people’s pensions, which is progress. But at the same time, all kinds of problems arise with the existing insured schemes and all the schemes at premium pension institutions, or PPIs, because they are now obliged to switch to a system that makes you wonder whether it suits them at all.
PPIs are companies that have an insured plan or a defined contribution plan with a PPI with a rising tiered scale, or companies with a defined benefit plan (the pension benefit is then proportional to last earned salary or average salary, ed.). Those companies are all used to younger people being a little cheaper and older people being a little more expensive. That was never a problem. Now all companies accustomed to that old arrangement are forced to switch to a flat rate arrangement, at least for new employees.’

What would you advise employers who want to prepare for the arrival of the WTP?
‘They should ask themselves now what their best option will be. There are a couple of ‘flavors.’ The first option is that as an employer you switch to the WTP system for all employees and start compensating people inside or outside the pension sphere. If you compensate within the pension sphere, as an employer you will in the period 2027 to 2037 soon have a 30 to 40 percent increase in pension contributions. After 2037 it could be more affordable, but in the intervening years you must deal with the enormous increase.
If you use compensation outside the pension sphere, then that compensation period extends somewhat more since you are not tied to the 10 years. You could then, perhaps, compensate, a 50-year-old in 18 years. But even then, you see a temporary premium increase of 25 to 30 percent. The question is whether companies are expecting this.’

And if an employer uses the transitional regime and introduces a flat rate?
‘Then he will also face an increase in premiums. The employer will not have a flat rate of 5 percent; the expectation in the market is that it will be somewhere between 10 and 15 percent. This implicates an increase in premium for younger people too, although it is comparatively fairly low. Moreover, the costs decline as people age and leave the company.
It is impossible to say in advance which choice will be best . There is no one size fits all. That is also why  it is so difficult for companies. It depends entirely on what the employee population looks like and what your expectations are about how that employer population will evolve over the next 10 to 15 years.
Regarding the latter, many people over 50 prefer to stay where they are because they are not particularly popular in the job market and employers are more likely to prefer younger people. So, an employer with many older workers who switches to a system with flat rate premiums will lose a lot of money in compensation.’

What do you think will happen in the transition phase?
‘I think companies with an insured plan or a plan with a PPI will spend a considerable amount of time analyzing what the best to do is, given their current and projected employee composition. I expect major problems for pension funds with the timing of all the changes. A few pension funds do want to phase in by 2025, but the bulk will not succeed until 2026 because the large pension providers do not have the manpower to manage the transition earlier. The danger is that things go wrong under time pressure. Then the question will be how to undo the whole process? It involves a little too much money to allow the transition to turn into chaos.’

And how will employers deal with the changed survivor pension scheme?
‘That is indeed something. In politics, it is usually assumed that soon, as a rule, 50 percent of the salary will apply as a survivor’s pension. An odd assumption because that would mean a doubling of the risk premium. Moreover, you get a curious distribution of income this way. Someone whose partner dies before retirement gets 50 percent of the deceased partner’s salary. But the moment that surviving partner receives AOW himself, he or she simply gets 17 or 18,000 euros on top and thus suddenly far more money. That seems completely illogical to me. It makes much more sense to consider a 25 or 30 percent coverage in combination with Anw gap insurance (Surviving Dependents Act). This will mean a much more even income for the surviving partner in the event of an employee’s death before retirement.’

The assumption that many employers will opt for a 50 percent survivor pension does indeed seem incorrect, given the high premiums involved. But what percentage will it be?
‘That is to an extent a budgetary issue. It depends on what happens if the current arrangement of the partner’s pension on death is converted to one in which 25 or 30 percent or some such percentage of salary is paid in combination with Anw gap insurance. The question is what the coverage will be and what does that mean for premiums? You must compare those two schemes carefully. And I also definitely think the works council or another employee participation body should be involved in the decision on the new scheme.’

Is that not tricky? Because is there not a good chance that a 25-year-old has a very different view of life insurance than a 60-year-old? How to balance all the considerations that need to be considered?
‘For the 25-year-old, the chance of something happening is small, but if something does happen, it will have a big impact. The premium is relatively low. For the 60-year-old, the impact is far greater, but the time to retirement is much shorter. So there the coverage period is much shorter. The total premium amounts in effect do not differ that much. For those two groups it works out.
In my opinion the problem is more specifically with workers between 40 and 55: those are the most expensive people. With this group it will indeed be more difficult. But it also depends to what extent people within the company have already taken measures. Take a law firm: people there usually have everything taken care of. Better than in a company with much lower-paid production workers who also have fewer opportunities to arrange things themselves and where a wrong assessment can hit very hard.’

What is your perspective on the concept that the employer makes only a basic provision, and the employee is otherwise given the freedom to make additional arrangements? So, a low mandatory contribution from the employer for pension accrual and a relatively low percentage of partner’s pension, but extensive opportunities for the individual employee to take out additional insurance or to save up?
‘The money for that will have to come from somewhere - an employer will need to pay a significantly higher salary than competitors. Furthermore, as an employer you will really have to invest in communication. Because if you do not explain it well, it seems to me that the risk of claims from employees who did not realize they were so minimally insured is very high.
Incidentally, I do think employers should educate people and have pension conversations with them anyway. Explain what is covered if something happens and point out to people that they should also take measures themselves. Explain to people over 60 when they can or cannot retire early and what it means if someone stops working a little earlier or if they start working part-time - those kinds of topics. In my opinion, that forms part of good employment practices. It also does not need to be exorbitantly expensive for the employer; extensive town hall sessions are really not necessary, catching up with people online for half an hour from time to time will usually be enough.’

What about young people? How can we best explain to young people what the WTP means for them?
‘To start with: contradict the myth that young people do not need to worry about their pensions because when they stop working later, they will not get anything anyway. Many young people do not understand the complete system, which can lead to this kind of misunderstanding. Explain that building up your personal wealth is key - and that money has been set aside for each pensioner that no one is allowed to access.
That message is difficult to get across since so many pension funds have had to make cuts and there has been unrest among pension plan participants. But education by employers is important. You wish they would make the subject of retirement attractive. Sexy even, if possible. Now that does not often happen, if at all.’

Do you think the WTP is better suited to the current labor market? That is one of the assumptions.
‘That is an unworldly idea. The union has done research on this, and it shows that workers do not change jobs as frequently as is often thought and that they almost always stay within their sector. The increase in the number of self-employed workers in recent years has been the biggest factor that has contributed to the whitewash in pension accrual. The WTP does not address that.
However, the WTP does lower the entry age for a pension plan from 21 to 18, thus drawing all kinds of students and young people with weekend jobs into the pension plan - something which they do not want at all. At the same time the problems caused by the considerable increase in self-employed workers are not addressed at all. It is unrealistic.
If you really want to solve these problems there is only one thing to do: make pensions mandatory for everyone, including self-employed workers, who now do not have to make compulsory contributions, leaving them with a higher net profit than if they were employed. But politicians do not dare to do that. The big advantage of a compulsory pension contribution is that you eliminate a significant number of false self-employed people. They will automatically become more expensive if all companies need to offer both the employees and the contractors they hire in a certain pension plan and this is factored into the rates of the self-employed.’

What would that pension obligation ideally look like?
‘Everyone who earns money should put at least 10 percent of his or her income into a pension pot every year. Everyone gets to choose where he or she does that - in an escrow bank account, in an escrow investment account, with a pension fund or with an insurance company, it is up to them. You can use that money for the usual forms of retirement.
When someone becomes an employee, this should be part of  the terms of employment. For a self-employed person, the 10 percent is just a minimum, so that when he or she retires, he or she will be able to make ends meet with this pension together with the state pension. If it seems as though this is not going to work out? Then the self-employed person will have to find employment. Or raise his or her rates.’

If there was one section in the WTP that you could change, what would it be?
‘The ban on refunds in PPIs. Utterly ridiculous. I can understand a ban on refunds for solidarity reasons for pension funds. But a general ban on refunds, including for PPIs, makes no sense whatsoever. Suppose an employee who has a defined contribution plan with a PPI dies. Restitution can take place and the next of kin receives the assets which was built up to supplement the survivor’s pension - at least with a PPI, with a pension fund it ends up in the big heap. Perfectly logical.
But soon that will be banned, and that investment pot will be gone. Try explaining that to the deceased’s partner. Which leaves the question of what the PPI should do with that money. Distribute it to other participants in the PPI, perhaps. But unlike with a pension fund, what does an employee have to do with the employees of other companies? Why should he show solidarity with them? Someone who is in a PPI wants his or her money to go to his partner after his death. The ban is a very strange part of the new legislation. I am amazed at this idea. But it looks as though we will have to make do with this.’

This interview was published in Management Scope 05 2023.