Brans Brief number 10, year 8, Oktober 2005

In this issue of the Brans Brief:
 

	Additional transitional arrangements under the Early Retirement, Pre-Pension and Life-Course Savings Scheme (Wet VPL)
	Principles of Pension Fund Governance
	Age of entry to FPU+ not in conflict with the Equal Treatment Act on the basis of Age in Employment (WGBL)

Additional transitional arrangements under the Early Retirement, Pre-Pension and Life-Course Savings Scheme (Wet VPL)

With effect from 1 January 2006, all pension schemes must comply with the taxation frameworks laid down in the Early Retirement, Pre-Pension and Life-Course Savings Scheme Act (Wet VPL). This means that the level of all pension schemes must be aligned to the level of an old-age pension received at the age of 65. By definition, no tax advantages shall apply any longer to pre-pension, transitional pension and early retirement (VUT) schemes, except for employees aged 55 or above before 1 January 2005. If no adjustment takes place, the entire pension entitlement will be deemed to form part of the employee’s salary.

As it appears that up to the present, no adjustment has been carried out in relation to 25% of employees, there is a proposal to institute tax measures in 2006 for this category of employees. We wish to draw attention to the fact that this transitional entitlement has not yet received the approval of the Dutch Parliament. Recently, the Tax and Customs Administration (Belastingdienst) informed employers about this transitional entitlement. How does the transitional entitlement actually work in practice? What it means is that employees who continue their existing scheme will not suffer any negative consequences in 2006 in any event. This means that the reversal rule will continue to apply in its entirety. The employee’s premium will continue to be deductible for tax purposes and the accrued pension entitlement will not count as part of the employee’s salary. However, the employer may be confronted with a final levy of 52% on that part of the entitlement that gives rise to excess. Excess refers to a situation in which the present scheme comes out higher when recalculated on the basis of the new taxation standards governing the extent of premium payments. So as to determine easily whether or not this will be the case, the Tax and Customs Administration has provided a calculation tool on its website: (www.belastingdienst.nl/zakelijk/pensioenen).

In order to determine the extent of any excess, users are asked to enter a number of variables relating to the present pension scheme, including the type of pension scheme, the accrual percentage, the retirement age and, if applicable, the manner in which a provision for surviving dependents has been included. For example, a pre-pension scheme at the age of 63, combined with an old-age pension at 65, should be entered as an old age pension commencing at the target age of 63. Users then enter the level of the monthly premium, adjusted in accordance with the level of the premium for those over 55 years of age. The calculation tool then uses these criteria to calculate an amended accrual percentage for an old age pension commencing at the age of 63. An adjustment is made in relation to transitional pensions. More scope for taxation is created if the existing scheme does not incorporate a provision for surviving dependents’ benefit or provides for a risk-based surviving dependents’ pension. If the calculation tool indicates that a final levy of € 0 applies, then the premium level of the pension scheme involved will remain within the limits of the VPL-proof regulation. Employers are free to demonstrate that the outcome for them will be more favourable based upon the principles of the fund than the one arrived at using the calculation tool.

Incidentally, we are assuming that this transitional right does not apply to early retirement (VUT) schemes. The communiqué, however, does not address the issue. What this means is that according to the Early Retirement, Pre-Pension and Life-Course Savings Scheme Act (Wet VPL), the treatment for tax purposes of early retirement (VUT) schemes will be applied in full. Only half of the employee’s premium is tax deductible and the employee will be faced with a final levy of 26% on premium flows (except for those aged over 55).

In December 2005, employers will be asked to declare whether or not their pension scheme has been adjusted in accordance with the financial frameworks contained in the Early Retirement, Pre-Pension and Life-Course Savings Scheme Act (Wet VPL). This form should be returned in cases where the pension scheme has been fully adjusted in accordance with the Early Retirement, Pre-Pension and Life-Course Savings Scheme Act (Wet VPL), or in cases where it has not yet been adjusted but where the calculation tool indicates that no final levy will apply. The form does not therefore need to be returned in cases where a final levy applies. In 2006, the Tax and Customs Administration (Belastingdienst) will check whether employers who have not submitted a declaration are in fact deducting the final levy. We would like to draw attention to the fact that on 1 January 2007, pension schemes will need to be adjusted in accordance with the Early Retirement, Pre-Pension and Life-Course Savings Scheme Act (Wet VPL). As suggested earlier, it will then no longer be possible by definition to provide a pre-pension and/or a transitional pension. However, it will be possible to have a target retirement age that is lower than 65 years, if the accrual percentage for lifetime old age pension is adjusted.

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Principles of Pension Fund Governance

In September 2004, the Minister of Social Affairs and Employment asked the Labour Foundation (Stichting van de Arbeid (STAR)) to develop a system of self-regulation in relation to Pension Fund Governance. STAR entered into a long period of consultation with the Dutch Foundation for Company Pension Funds (Stichting Opf), the Dutch Association of Sector Pension Funds (VB), the Dutch Association of Insurers (Verbond van Verzekeraars) and the Coordination Platform for Cooperative Old People's Organisations (Coördinatieorgaan van Samenwerkende Ouderenorganisaties). The outcome of this consultation was a publication entitled “Principes voor goed pensioenfonds bestuur” (Principles of Pension Fund Governance), a draft version of which was published on 11 October 2005. During the coming weeks, the draft document will be submitted to the membership of STAR, as well as to the involved organisations mentioned above. Thereafter, the final version of the text will be compiled and presented to the Minister of Social Affairs and Employment.
STAR would like to see the principles take effect on 1 January 2006 and would also like compliance with those principles to be laid down in law. DNB would then be required to supervise compliance with the principles. Pension funds should then be given two years, i.e. until 1 January 2008, to adjust their administrative organisation and internal control system (if necessary) and to comply with the principles. Thereafter, in 2008, it would be necessary to evaluate whether or not self-regulation actually works in practice.

The core of the principles is the periodic provision to all interested parties of a statement concerning policies adopted, as well as operating an adequate and transparent system of internal controls. For most pension funds, the most important “innovations” contained in the principles are as follows:

• the setting up within pension funds of an accountability body, on which the employer, the participants and pensioners are represented in equal numbers (and, linked to this, the possibility of the participants council being merged with this accountability body);
• the shaping of a system of internal supervision, with the choice of either a three-yearly inspection or an annual internal audit;
• an internal procedure for complaints and disputes;
• a procedure that will provide a periodic evaluation of both the entire Board as well as of individual Board Members and, linked to this, the ability of the Board to replace a Board Member due to unsatisfactory performance;
• the implementation of an adequate communications policy.

We will provide you with more details on this subject as soon as the principles have been finalised.

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Age of entry to FPU+ not in conflict with the Equal Treatment Act on the basis of Age in Employment (WGBL)

Recently, both the Court in Breda and the Equal Opportunities Commission (CGB) ruled that the Flexible Pension and Retirement Scheme (FPU+), which allows only employees entitled to FPU who were born before 1 January 1948 to retire, is not in conflict with the Equal Treatment Act on the base of Age in Employment (WGBL).

In reaching their decision with regard to the FPU+ scheme, which is comparable to a VUT provision, both the Court and the CGB considered to what extent the FPU+ scheme can be regarded as a pension provision within the meaning of the Equal Treatment Act on the base of Age in Employment (WGBL). Both bodies ruled that the FPU+ scheme fulfils all of the criteria laid down in the WGBL for it to be regarded as a pension provision. The CGB indicated explicitly that the FPU+ scheme can be designated as a special, temporary pension provision for employees eligible for redundancy in connection with a reduction in the number of posts.

Now that both bodies have ruled that the FPU+ scheme should be regarded as a pension provision within the meaning of the WGBL, the court and the CGB have ruled that the distinction according to age that is applied within the scheme falls under the statutory exemption (relating to age of entry) and is not therefore in conflict with the Equal Treatment Act on the base of Age in Employment (WGBL).

Partly in view of the parliamentary background in relation to what constitutes a pension provision, we have our doubts as to whether the definition of a pension provision can be stretched far enough to include an FPU+ scheme. In our opinion, the statutory exemption contained in the Equal Treatment Act on the base of Age in Employment (WGBL) is in no way applicable to the current FPU+ scheme and therefore an objective reason needs to be found in order to justify this distinction on the basis of age.

It remains to be seen whether or not the recent decision taken by the Court or the ruling of the CGB will stand up to scrutiny or will be quashed by a higher body upon appeal.

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