EMPLOYER ACTION CODE: ACT
Effective January 1, 2018, the target retirement age (TRA) for occupational retirement plans in the Netherlands will increase from age 67 to 68. Depending on their current benefit designs, the new TRA may result in some plans exceeding the maximum level of tax-qualified benefit accrual, unless they take action before 2018 to avoid this outcome. An increase in TRA is automatically triggered by an increase in average life expectancy as determined by the Central Bureau of Statistics. Based on current mortality projections, the next TRA increase is not expected before around 2025.
By 2018, the government also aims to introduce a system of automatic value transfers (AVT) of small pension entitlements to prevent these from being paid out as a lump sum.
Increase of target retirement age
The statutory maximum annual benefit accrual percentages for defined benefit (DB) plans will remain unchanged, but as a result of the TRA change they will be linked with higher retirement ages. In particular, the retirement ages and corresponding DB maximum accrual rates, effective January 1, 2018, are as follows:
|Retirement age in plan rules
||Maximum annual accrual rates – Career-average pay DB Plan
||Maximum annual accrual rates - Final-pay DB plan
For example, a career-average DB plan with a current normal retirement age of 67 and benefit accrual rate of 1.875% (and with other benefit parameters also at the maximum permitted) would either have to increase normal retirement age to 68 or reduce the benefit accrual rate to 1.738% in order to remain within the tax-qualified limits. Currently, the maximum accrual rates (1.875% and 1.657%) correspond to a retirement age of 67.
Similarly, the tax-effective limits for defined contribution (DC) plan contribution rates, as a percentage of covered earnings, are also being adjusted from January 1, 2018 (these announced rates are preliminary but are not expected to change). Following are the maximum tax-qualified rates, based on a 3% annual interest assumption:
|Age of participant
||Maximum DC contribution – employer + employee, effective 1/1/18
The Ministry of Finance and the supervisor (De Nederlandsche Ban—DNB) maintain that plan members’ consent is not required when accrued pension entitlements are adjusted in line with an increase of the plan retirement age resulting from a legal adjustment of the TRA. Draft legislation to confirm this is pending approval in parliament.
The normal retirement age for the state pension (AOW) is also automatically linked to life expectancy improvements, and any increase must be announced at least five years in advance. The government has announced that the AOW normal retirement age in 2022 will increase from age 67 to age 67 and three months.
AVT of small pension entitlements
When a member leaves a plan due to termination, current law permits pension funds to pay out small occupational pension entitlements (i.e., corresponding to less than EUR 467.89 per year) as a lump sum starting two years after the date of leaving. Higher pension entitlements remain in the plan, unless members expressly request the value transfer to the pension plan of their new employers, and must always be paid as a lifetime pension. Members who receive such a lump sum (which is taxed as income) have no obligation to invest it for retirement. Many employees in the Netherlands have accrued separate small pension entitlements with various employers, which in combination may be substantial. To help promote lifetime pensions, the government is aiming to introduce by 2018 an AVT system that gives pension funds and insurers the right to transfer terminating employees’ accrued pension entitlements (up to the aforementioned cap) to the pension fund or insurance of their new employers (if any).
Willis Towers Watson survey on the future of pension design
The political parties that are currently negotiating a governmental agreement have all, to different degrees, advocated a transition to individual pension accounts and a change to a more generationally fair accrual pattern. The agreement is expected to propose significant changes to Dutch occupational pension design, to be effective as of 2020. In anticipation of the proposals, Willis Towers Watson recently surveyed employers regarding their views on the future of pensions. Sixty-eight employers with a total of around 320,000 employees participated. The vast majority agree that changes are needed. Most employers find that the expected new agreement will be more generationally fair, although many are concerned that employees will not make optimal choices and will save too little for their retirements.
Clients will need to examine whether any changes to their DB and DC retirement plans are necessary or desirable as a result of the changes. Longer-term impacts on the workforce of changes in retirement age and the government’s anticipated 2020 pension road map may also merit consideration at this point.
The Cabinet has agreed to the AVT proposal but the Second and subsequently the First Chamber must still approve it. If enacted into law, pension plan rules may need to be adjusted to include the AVT of smaller pension entitlements to the fund or insurance of the new employer, if the pension fund or insurance company chooses to exercise this option.