Brans Brief number 5, year 9, may 2006

In this issue of the Brans Brief:
 

	Possible changes to FAS requirements
	Distinction between over-55s and under-55s in pension schemes and age-linked lifecycle savings contributions held to constitute unequal treatment
	The role of disability pensions in the Dutch Pensions Act

Possible changes to FAS requirements

The US Financial Accounting Standards Board (FASB) has proposed amending requirements FAS 87, 88, 106 and 132(R). The proposed changes concern the annual accounts of businesses according to US GAAP. According to the proposal, the balance of ‘projected benefit obligations’ for pensions and the ‘plan assets’ should be included on the business’s balance sheet in unabbreviated and complete form. Under the present rules, certain ‘unrecognised amounts’, such as unexpected benefits or setbacks, are only accounted for in part.

Another proposal is that it should be made obligatory to have the reference date of the calculations be the same as the balance sheet date (as is the case with International Accounting Standard 19) and may not be three months earlier (as under the present US GAAP rules). If the proposal is adopted, the new rules will apply to financial years ending after 15 December 2006, and will have to be implemented with retroactive effect.

In a letter to the FASB, Watson Wyatt has referred to accounting in full for the balance of the projected benefit obligations and the plan assets as being consistent with ‘emerging international accounting practice’, but that further simplification could be achieved by accounting for all profits and losses simultaneously in the manner permitted under International Accounting Standard 19, i.e. not in the results. Watson Wyatt also feels that it should be sufficient to provide reasonable estimates based on provisional data.

Abolishing the method of ‘smoothing’ on the balance sheet using ‘unrecognised amounts’ is a matter of presentation, since the entire current ‘funded status’ is already required in the notes to the balance sheet under the present rules. It is our impression that credit raters and financial analysts already take account of those notes. If the stock market is efficient, the implications for the market value of the business are zero.

For more information contact: Roland van Gaalen.

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Distinction between over-55s and under-55s in pension schemes and age-linked lifecycle savings contributions held to constitute unequal treatment

On 7 April 2006, the Dutch Equal Treatment Commission (‘the Commission’) judged the question of whether a pension scheme that distinguishes between members who were 55 or older on 1 January 2005 and members who were younger than 55 on that date constitutes a prohibited distinction according to age (Judgment 2006-62). Pursuant to the Dutch Equal Opportunities (Age in Employment) Act (‘WGBL’), it is not permitted to make any distinction based on age in pension schemes, unless that distinction can be justified on objective grounds. In this case, the Commission was asked to assess an objective justification.

In the case in the present proceedings, workers who were 55 or older on 1 January 2005 retain the pre-pension scheme with the retirement age of 62. The employer contributes 1.25% of the worker’s wages to the contributions for pre-pension. For the under-55s, the retirement age is 65 and the pre-pension scheme has been abolished, although any rights already accrued are retained. The 1.25% employer contribution to the pre-pension schemes of under-55s has also been abolished, without any form of compensation. In the new scheme, the old-age pension accrual percentage is raised and the deductible lowered. As a result, the eventual pension result achieved will be virtually identical to the present situation, for all workers. The under-55s can stop working at the age of 62, provided that they are prepared to voluntarily contribute 4.1% of their annual wages to the lifecycle savings scheme.

The prohibition on age-based distinction does not apply to entry ages laid down in pension schemes. As such, the Commission first held, contrary to its judgment of 30 September 2005 (judgment 2005-178) that the age of 55 on 1 January 2005 cannot qualify as an entry age within the meaning of the WGBL. The Commission then ruled that the distinction between over-55s and under-55s is based directly on the member’s date of birth, which constitutes a direct age-based distinction within the meaning of the WGBL. Pursuant to the WGBL, distinction is permitted if it can be objectively justified.

The Commission will examine whether or not any objective justification existed by assessing the purpose of the distinction and the means used to achieve that purpose. The purpose must be legitimate, and the means used must be appropriate and necessary. If these three conditions are met, the distinction does not qualify as being contrary to the WGBL. The purpose of the age-based distinction is to ensure that all workers have similar ‘pension results’ and consequently can stop working at the age of 62.

The Commission held first and foremost that a distinction that is based on the distinction made in the Dutch Early Retirement, Pre-Pension and Lifecycle Savings Scheme Act is not automatically justified. The purpose described above was judged by the Commission to be legitimate. The means was considered to be appropriate since the result has been approved by both the trade unions and the entire workforce. The assessment of whether the means is necessary revolved around the fact that for the over-55s the employer contributes 1.25% of their wages to the pension scheme, while no contribution is made to finance retirement at 2 for the under-55s. This difference in treatment was held to be unnecessary, as shown by the standard-worker calculations. An important factor in this respect is that the employer’s contribution to the pension scheme is not balanced by a lower worker contribution to the pension scheme by the under-55s. In short, the Commission considered that no evidence had been put forward demonstrating the existence of an objective justification.

Besides this variant, the employer also submitted another variant to the Commission. The question is whether it is contrary to the WGBL to distinguish between workers of different ages by contributing age-linked contributions to a lifecycle savings scheme. The distinction is based on the brackets in the tax system created for the purpose of pension schemes. The WGBL provides an exception for distinctions according to these brackets. The Commission considered that the lifecycle savings scheme is essentially a savings scheme rather than a pension scheme. The fact that the contributions to this savings scheme use the contributions system of a pension scheme does not alter this: the lifecycle savings scheme can be used for other forms of leave besides only early retirement. As such, the exception provided in the WGBL for defined contribution brackets was held to be inapplicable to lifecycle savings schemes. The Commission then judged that the means is not appropriate, in light of options available to workers to use the employer’s contribution for other matters than early retirement.

For more information contact: Mirella Verhaaf.

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The role of disability pensions in the Dutch Pensions Act

On 17 May 2006, the Lower House of Dutch Parliament received the policy document based on the report on the Dutch Pensions Act. In that document, the Dutch government responds to questions and comments put forward by the Standing Committee for Social Affairs and Employment in connection with the legislative proposal for the Act. One of the topics that the government addresses is the disability pension in relation to the Dutch Work and Income (Capacity for Work) Act (‘WIA’). Under the system of the Dutch Disablement Benefits Act (‘WAO’), the usual practice was that beneficiaries were offered supplements to the benefits under that Act via pension funds (e.g. the WAO gap pension and the WAO top-hat pension). The structure of the WIA, which entered into force on 1 January 2006, is very different from that of the WAO. This has implications for the supplements that pension funds are permitted to offer.

The government feels that disability pensions may only be designated as such and administered by a pension fund if those pensions depend solely on the degree of disability. They may not cover the unemployment risk as described in the WIA. According to the government, supplements to the benefits under the Dutch Regulations on Income (Full Disability) (‘IVA’) qualify as disability pensions within the meaning of the Dutch Pensions Act, since IVA benefits are granted in the case of full disability, without the unemployment risk factoring into those benefits. A second condition is that the amount of the disability pension may vary according to the type of benefits under the Dutch Regulations on Work Resumption (Partial Disability) (‘WGA’). According to this line of reasoning, the WGA gap, as it is generally called, which compensates for the difference between the follow-up benefits under the WGA and the wage supplements under the WGA, may not be administered by pension funds. Top-hat pensions covering the difference between the maximum daily wages and the actual wages may still be administered by pension funds, provided that they only cover the risk of loss of income stemming from disability. The government’s position on disability pensions reflects the position currently adopted by the Dutch Central Bank. Since the WIA already entered into force on 1 January 2006, this also affects the period prior to the entry into force of the Dutch Pensions Act.

For more information contact: Harmen Pullen.

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