Brans Brief number 2, year 8, February 2005

In this issue of the Brans Brief:
 

	Dutch Upper Chamber passes the Vut, early retirement and life-cycle bill
	Court rules against Campina Retirees Association
	Decree on pre- and post-indexation of pensions
	Basic course for pension fund managers

Dutch Upper Chamber passes the Vut, early retirement and life-cycle bill

On Tuesday 22 February 2005 the Vut, early retirement and life-cycle bill (hereafter the VPL Act) was passed by the Dutch Upper Chamber of Parliament. During the plenary debate on 15 February however it emerged that many comments had been attached. The Upper Chamber, whose primary consideration is the practicability of legislation, expressed doubts regarding bringing the new law into effect from 1 January 2006. Minister de Geus’ response was that the date was ‘ambitious, but achievable’. According to de Geus, the period of nine months allowed for pension administrators to amend their schemes should be sufficient. There will be a review in September to assess the feasibility of the 1 January 2006 target date, but no details were given of how this would be conducted.

Besides the doubts expressed as to the date of implementation, several clarifications were added that in our view could have significant consequences for schemes in existence on 31 December 2004, as well as the proposed changes thereto. In particular, the issue appears to be the continuation - or elimination - of the possibility for application of the standing right exemption.
Below we list a few points mentioned in the Memorandum of response and the stenographers’ report of the plenary debate in the Upper Chamber.

Changes to the scheme within the present Witteveen framework are possible until 1 January 2006
A scheme can be changed within the present Witteveen framework until 1 January 2006. Also, the meaning of the term ‘existing scheme’ could be significantly widened. It is actually the case that a VUT (collective retirement) scheme in existence before 1 January 2005 can be converted into an early retirement scheme without having to create a new scheme.

Purchase of pension shortfall and 15-year financing
The VPL Act allows for a commitment to be given for the purchase of a pension shortfall sustained at the employer or former employers. In the plenary debate, it emerged that the purchase of a pension shortfall may be formulated as a conditional commitment. The claim can actually be granted after a maximum of 15 years, or the retirement date if earlier. This appears to be a change of policy from the current PSW (Pensions and Savings Funds Act) on the grounds that if the claims are not financed they can not be designated as an unconditional commitment in the sense of the PSW.

Continued accumulation of pension during disability
If pension is still accumulated during disability, accumulation after 1 January 2006 must be completely amended in line with the new tax framework of the VPL Act.

Application of standing right exemption: proceed with caution!
In the middle of this year, at the same time of the reading of the Unemployment Act, the decision will be made regarding the abolition of the standing right exemption. From 1 January 2005, a broader definition of a VUT scheme applies. The term VUT scheme is taken to mean: “a scheme which exclusively or almost exclusively is designed for benefit immediately prior to the start of payment of benefit under a pension scheme or the AOW (Dutch General Old-Age Pensions Act) or for payment of additional benefit under a pension scheme”. Since a standing right is usually formulated as a supplement to pension or income other than prior to reaching age 65, there is the possibility that the new VUT scheme will be amended on the standing right model. This could lead to a final charge being levied on the employer. We therefore advise caution regarding application of the standing right model.

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Court rules against Campina Retirees Association

The managers of the Campina pension fund decided at the end of 2003 to reduce the indexation of the pension claims and rights of inactive participants and pensioners for the period 2004 to 2008. The measure was part of the recovery plan for the fund, which was necessary to repair the shortfall in its reserves. The Retirees Association (Vereniging van Gepensioneerden Campina, or VGC) did not agree with the reduction in indexation. Legal proceedings on the merits of the measure are in progress, and it may take some time before these are concluded.

Prior to the ruling, in early 2004 the VGC successfully forced the fund management in the regional court in any case to revoke the cut for 2004. More details of the court’s verdict can be found in the April 2004 issue of Brans Brief.

The pension fund appealed against the court’s verdict, and on 25 January 2005 the Arnhem Court reversed the regional court ruling, considering the following issues to be important:

• The fund management was unanimous in its decision to reduce the indexation.
• The participants’ council had given a majority vote in favour of giving a positive recommendation on the management decision, and, importantly, former participants were well represented on the council.
• When assessing an objection by part of the participants’ council, the PVK (the Dutch Pensions and Insurance Board, the former regulator; the regulator is now the Dutch central bank, or DNB) considered that the fund management had fairly protected the interests of the pensioners.
• The management decision to reduce the indexation served as the basis for the revision of the indexation clause in the scheme (the temporary reduction has now been included in the scheme).
• The change to the scheme took place in accordance with the applicable statutory procedure. Notably, according to this procedure the participants had taken the decision regarding the temporary reduction in the indexation rights held by the inactive participants.
• The articles of association of the scheme allow for a reduction in claims and rights if the fund’s financial position so demands, which in the opinion of the external actuary was the case. For these reasons, the VGC’s argument that a change in the scheme cannot lead to a reduction in acquired claims or rights was rejected.

As stated earlier, a ruling still has to be made in the current legal proceedings. We will of course keep you up to date with developments.

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Decree on pre- and post-indexation of pensions

In a Decree dated 21 January 2005, further elaborations were made regarding the indexation of pensions. Indexation may be made on the basis of the salary index, a price index or a fixed percentage agreed in advance. This also applies to pre-indexation.
Nothing changes for active participants in final salary schemes, or for defined contribution schemes. The policy also does not apply to pension schemes in which benefit payments are stated in fractions. Note however that the fixed percentage increase may not be more than 3%. The previous Resolution of 1978 under which 4% was permitted has now been revoked. Pension schemes with a fixed indexation of more than 3% a year must be changed prior to 1 January 2006 with retroactive effect to 21 January 2005 (this will affect insurers far more than pension funds, as the latter mostly feature open indexation).

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Basic course for pension fund managers

There will soon be another basic training course for pension fund managers. The two-day course will include basic information about relevant legislation, types of pension schemes, financing methods, actuarial reporting and the investment process.
The course is also suitable for members of works councils, participants’ councils or those working for a pension fund.
The course will be held on 13 and 14 April in Zeist.

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Questions or Remarks?

If you have any questions or remarks concerning this issue of the BransBrief, please let us know.

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