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In this Watson Wyatt Update:
The cost-covering contribution, which consists of the actuarial lump sum plus surcharges for costs, solvency and any indexation, has to be calculated based on the current market interest rate. The cost-covering contribution does not however have to be the measure against which the actual contribution paid is tested. If desired, a fund may use a ‘smoothed’ cost-covering contribution, which is identical in composition through various methodologies, but for which smoothing may be applied. For example, an average historical market interest rate may be used instead of the current market rate, or even an average of realised or expected returns. If returns are used, the approach must be a conservative one. An important limiting condition is that a continuity analysis must show that with the contribution paid will allow the fund to remain in a healthy condition over the longer term.
Integration of the surcharges for solvency and indexation is also not permitted if a smoothed contribution is used, nor is the deduction of a solvency release. If a pension fund wishes to apply one or both of these measures, this will occur by means of a contribution discount. A contribution discount is permitted under the new Pensions Act if it is expected that the allocated indexation can also be paid after the discount is applied. This has to be shown through continuity analysis.
For more information contact: Wichert Hoekert.
The reality of the financial markets is that businesses are sometimes forced into mergers, acquisitions and other restructuring processes. This can improve the efficiency of the business concerned. However there can also be harmful effects. “We cannot resign ourselves to being engulfed by a wave of international capital”, was the conclusion of a balanced study in Het Financieele Dagblad (“Breed debat nodig over plunderkapitalisme”, 6 March 2007). For pension plans, the danger is not one of capital flowing in, but of capital flowing out. As long as the current market value of the accrued pensions is secured by collateral in a pension fund or insurer with sufficient general reserves to meet shortfalls and realise the indexation policy, continuity depends less on the existing business structure. This serves as further reason to endorse the standpoint of De Nederlandsche Bank that a 'race to the bottom’ in the interpretation of the European directive for pension institutions is not in the interests of the participants (in a speech by bank director Witteveen, 16 April 2007). Reducing the necessary provisions by adding a risk premium for equities to the discount rate, attributed to international competitiveness, is not in the spirit of the Dutch regulatory system. Moreover, this would conflict with the need for a solid form of capital protection in a world in which corporate financial structures are by no means permanent.
For more information contact: Roland van Gaalen.
On 1 July 2007, benefit paid to fully and permanently disabled employees under the WAO (previous National Disability Program) will be raised from 70% to 75%. The increase also applies to fully and permanently disabled employees receiving benefit under the Invalidity Insurance (Self-Employed Persons) Act [WAZ] and the Invalidity Insurance (Young Disabled Persons) Act [Wajong]. This is due to a lower than expected inflow to the IVA (new National Disability Program), as established in the Autumn Agreement of 5 November 2004, on the basis of which the IVA benefit had already been raised from 70% to 75% as of 1 January 2006. Furthermore, employees unfit for work under the WAO, WAZ and Wajong aged between 45 and 50 years on 1 July 2004 will no longer be evaluated under the new tighter standards. This group will be re-evaluated, but in accordance with the previous (more lenient) rules.
For more information contact: Sandra Bertram.
The Decree on the Financial Assessment Framework for pension funds [FTK decree] contains the conditions under which a pension fund may take account of subordinated loans in the establishment of its general reserve. Subordinated loans are usually provided by the employer to the pension fund, and are subordinate to the claims of other creditors. Two important changes have been made to the draft version of the FTK decree. This article explains these changes further.
The first change concerns the degree to which the subordinated loans may be included in the calculation of a pension fund's general reserve. In the determination of the general reserve, subordinated loans may be included to not more than the lower of:
50% of the required general reserve for the pension fund;
50% of the general reserve for the pension fund;
In the draft FTK decree, the former limit was 50% of the minimum required general reserve. The rules for subordinated loans have therefore been relaxed on this point.
The second change relates to subordinated loans with a fixed maturity. In the draft FTK decree, the only condition included was that the original maturity must be at least 5 years. In the FTK decree, it has been added that the extent to which a subordinated loan may be included in the general reserve should be reduced on a straight-line basis for at least 5 year prior to the redemption date. This provision limits the inclusion of fixed-maturity subordinated loans in the last years before they mature.
Under the Pensions Act, pension funds may not enter into loans, unless the loan is temporary (maximum one year) for liquidity purposes. Subject to the above-mentioned limiting conditions, an exception is made for subordinated loans regarding this prohibition.
For more information contact: Harmen Pullen.
To qualify as a pension contribution for tax purposes, the contribution should be withheld from the salary of the person concerned. This gives the individual concerned a tax benefit. In certain situations in the past, including the contribution as negative salary in the income tax return was permitted. The situations addressed are ones in which the contribution was paid by the person concerned, but was not withheld by the employer from their salary:
In a situation in which the employer/pension administrator did not cooperate in the withholding of the contribution, or in which the contribution was too low, the person concerned could still receive the tax benefit through their income tax.
The above summary of situations was expanded in the tax Decree of 16 March 2007, no. CPP2007/482M, Government Gazette no. 60. The situation has been added in which a pension plan is continued on a voluntary basis, which is possible under certain conditions. It has now been decided that in this situation the person concerned may also include the contribution they have paid as negative salary in their income tax return.
It has also been further decided that for the cases described under a, b and c, the interested party (only at the request of the inspector) has to state in writing that the deducted amounts form an irrevocable part of a pension plan applicable to the party in respect to the Income Tax Act 1964 [Wet op de loonbelasting 1964]. In the past, the interested party had to provide this statement annually.
The following additional conditions apply to voluntary continuation:
For more information contact: Eric Heemskerk.
If you have any questions or remarks concerning this issue of the Watson Wyatt Update, please let us know.
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