Employer Action Code: Act

The new coalition government has announced measures to further limit tax advantages for pension plans in the Netherlands starting in 2015 or possibly even 2014.

In July 2012, it had already been announced that the tax relief available to pension plans in the Netherlands would be reduced. Beginning January 1, 2014, tax relief would only be provided on pension accrual in average-pay plans up to 2.15% each year rather than the previous limit of 2.25% each year, and 1.90% for final-pay plans rather than the previous limit of 2%. Also, the retirement age would increase to 67.

The recent announcement goes much further:

  • The maximum tax-effective accrual is reduced by a further 0.4%, to 1.75% per year for average-pay plans.
  • Maximum tax-effective accruals for final-pay plans and defined contribution plans are also likely to be affected, but details are not yet clear.
  • The salary that a tax-effective pension can be built upon is capped at €100,000 (US$127,000).

Key Details

The reduction of the maximum accrual rate for average-pay plans is justified using the argument that a pension of 70% of average salary remains available after a 40-year accrual period and that this represents the socially accepted normal pension level. However, it does not mention that previously, the target had been 70% of the last earned salary rather than average salary.

Compared to the current limits for average-pay plans (accrual of 2.25% each year and retirement at age 65), the new limits (accrual of 1.75% each year and retirement at age 67) reduce the value of the maximum tax-effective benefit accrual by approximately 30%, based on current interest rates.

The Netherlands Bureau for Economic Policy Analysis has estimated that the new measure will increase tax revenues to the government by nearly €3 billion (US$3.8 billion). However, it should be noted that, unlike other tax increases, it largely just shifts the timing of the tax burden. The shift results in a generational redistribution of tax — tax that otherwise would have been payable in the future and thus had an impact on the budget in the future will now be used to overcome the current deficit.

In determining its estimates, the bureau assumed that the cash not paid to fund pensions will instead be largely paid as salaries and will therefore be taxable. It is not clear whether and to what extent that will happen. Observers expect that the reduction in fiscal limits will further accelerate the general reductions in pensions experienced over the last few years.

Employer Implications

Career-average-pay plans represent the majority of supplemental pension plans in the Netherlands. These plans will need to be reviewed. It is also likely that final-pay plans and defined contribution plans will need to be reviewed once the changes are fully announced.

To the extent that efforts to implement the changes announced in July 2012 are under way or already completed, those agreements will need to be revisited.