Watson Wyatt Update, October 2007
Number 9, volume 10
In this Watson Wyatt Update:
Budget Day 2008
On 18 September 2007, the Tax Plan and the Bill on Other Tax Measures for 2008 were published as part of the Budget Memorandum. This summary sets out the key points of these plans. We would like to point out that the proposals have yet to be approved by the Lower and Upper Houses of Dutch Parliament.
Director and principal shareholder
On 1 January 2008, the salary of the director and principal shareholder (abbreviated to DGA in Dutch) who is the only employee of his/her private limited company was no longer supposed to be subject to wage withholding tax (abbreviated to LB in Dutch) and would instead be directly subject to income tax (abbreviated to IB in Dutch). Originally, if a regular employee were to join the company, the DGA would then be subject once again to LB in the same year. The Tax Plan now stipulates that whether the DGA is the only employee or whether several DGAs have only one employee will be established on 1 January. Changes during the calendar year have no consequences in terms of a LB-to-IB shift or vice versa. This will considerably reduce the administrative burden. This change takes effect on 1 January 2008.
Corporation tax rate
The corporation tax rate is to be reduced. The first tax band will be raised to €40,000 (20%), while the upper limit of the second band will be raised from €60,000 to €200,000 and the rate will be reduced from 23.5% to 23%. There are no changes for the taxable amount exceeding €200,000 and the rate will remain unchanged at 25.5%.
The changes take effect on 1 January 2008.
Capping of pension accrual
The beneficial entitlement to pension accrual for tax purposes (deferred taxation system) can only be applied to a pensionable salary up to a maximum of €185,000. This limit will be indexed annually. If the employee has had several full- or part-time employment contracts, this limit will be corrected for each employment contract. Existing pension commitments in which the pensionable salary exceeds this limit do not need to be adjusted. However, before the capping scheme is introduced on 1 January 2009, the employer must submit a request to the tax inspector to divide the scheme into a net and gross part. As far as the gross part is concerned, the entitlement will be calculated as part of the employee’s salary (the contribution). Any personal contribution is not deductible and the payments can only be received tax free when the time arises. Furthermore, the value of the gross entitlement will have to be added annually to the tax base of ‘Box 3’ (1.2% tax on imputed return on investment) on the income tax return. This change takes effect on 1 January 2009.
We believe that the employer and the pension administrator must consult each other on this matter. Simply continuing with the pension scheme (after division) will produce an undesirable net effect in the accrual phase. After all, the employee will be taxed on the gross entitlement, whereas this contribution must be financed from net income (excluding pension contribution). Furthermore, the ‘Box 3’ levy will negatively impact the total tax burden compared to the old situation.
A division of the scheme into a net and gross part will entail considerable costs, both for the pension administrator (pension statement, ‘Box 3’ valuation) and the employer (payroll administration). The question is how this can be reconciled with the reduction in the administrative burden championed by the government.
The pension entitlements accrued up to 1 January 2009 on the basis of a personable salary in excess of €185,000 will be respected.
Dutch VAT
The general VAT rate will be raised from 19% to 20%. This change will take effect on 1 January 2009.
Age-related benefits – general old-age pension
The plans proposed in the coalition agreement to have pensioners pay an additional levy on supplementary pension have been put on the back burner, but have certainly not been dismissed altogether. In order to ensure that the state old-age pension (abbreviated to AOW in Dutch) remains linked to the cost of living in the future, retired persons with a relatively high income (i.e. an annual supplementary pension exceeding EUR 18,000) will be asked to pay a contribution. Starting in 2011, they will contribute towards the AOW. This applies to those born after 1945 (i.e. those who starting in 2011 will be 65 years old). As freedom of choice is paramount, the system has two components: a positive incentive for people to continue working longer and a means-based contribution.
The Queen’s Speech did not address raising the state retirement age. It is uncertain whether this will be put back on the agenda at any time in the future.
Pension accrual for self-employed persons
On 7 September (i.e. prior to Budget Day), the Dutch Cabinet reached the conclusion that self-employed persons have sufficient opportunities to build up a supplementary pension. For this reason, additional government measures to stimulate this accrual further are unnecessary. The Cabinet approved a memorandum addressing this matter submitted to the Lower House of Dutch Parliament. The memorandum responds to requests from the Lower House to take action on the pension accrual of self-employed persons.
During the debate regarding the Pensions Act, it was determined that self-employed persons who were previously in salaried employment and also derive their income from profits, may accrue an additional ten years’ pension with their former pension administrator instead of three years. However, the contributions are only tax deductible for three years. At the request of the Lower House, the government has now examined whether these contributions can be made tax-deductible for ten years too. According to the government this is not possible partly because it conflicts with the rules of equal treatment, as other groups of self-employed persons do not enjoy these tax advantages. For example, self employed ex employees who derive their income from other work may continue accruing pension with their former pension administrator for only three years and therefore derive only three years of the tax advantage.
For more information contact: Eric Heemskerk.
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Objective assessment of current and prospective pension administrators
Due in part to the more stringent regulatory requirements in the Pensions Act, many pension funds are examining – and in some cases reconsidering – their position. A growing trend can be seen in the number of pension fund liquidations. Often these liquidations mean that the obligations of the fund are transferred to an insurer. Pension funds and employers are also increasingly asking themselves whether they are in fact with the appropriate pension administrator. It can be reasonably expected that the number of decisions to outsource will continue to increase. Two questions figure prominently in this decision: Which pension administration organisation should I choose? What risks do I run as a result?
Watson Wyatt is introducing a unique method to objectively assess the quality of the range of services offered by pension administrators. The Pensions Administration the Netherlands Rating System (PANRAS) makes it possible to compare the range of services offered by pension administration organisations to a pension fund’s needs. The needs of the customer play a central role in PANRAS. The assessment is based on a comprehensive analysis of customer needs. PANRAS can be used by pension fund administrators, as well as by employers who do not have their own pension fund but instead deal directly with an insurer in the form of a ‘directly insured scheme’.
Quality
Price should not be the only consideration when choosing a pension administrator. Choices are generally – and often incorrectly – based on price, given the significant time and financial investment involved in migration processes. It is more important, however, to look at the quality of the pension administration. In determining quality, it is essential to find a good match between what the administration organisation offers and what the client needs. The significant changes in legislation and administrative requirements are forcing pension administrators to provide better quality.
PANRAS compares the range of services offered by the administrator and what is needed in order to identify what needs can be met by the administrator and which services are lacking. In addition to the ‘what’ of the administration, the ‘how’ is also examined critically. For example, the manner in which the administrator has organised the processes in order to offer a successful range of services should also be addressed. Taking all these variables into account, PANRAS can then assess the quality of the total package of services based on the client’s definition of quality. A positive assessment of quality is only possible when the services offered by the administrator closely match the client’s needs.
Method
Backed up by years of experience in facilitating the outsourcing of pension schemes to pension administration organisations and insurance companies, Watson Wyatt is able to assess all the relevant elements of the outsourcing process. For example, we examine the production process (including marketing, managerial supervision, communication and account management), as well as the supporting functions (such as project management, human resources, automation and governance structure). Although quality is the critical factor, the costs will naturally also be subject to scrutiny. The assessment is based on a very detailed questionnaire, which can assess more than 900 areas. The correctness of the responses is then verified. In addition to the various methods built into the questionnaire itself, this is also done by means of interviews with employees of the pension administration organisation held during company visits. Other means of assessing quality include the SAS70 analysis, the review of information available from the auditor, and reference visits to customers of the administration organisation made to determine customer satisfaction.
Click on the diagram above for a larger version.
Control of outsourcing
PANRAS enables a pension fund board or employer to assess, based on objective criteria, whether a pension administrator can deliver the desired service and, if so, at what level of quality. After all, nowadays, pension fund managements must be full in control of all the matters they have outsourced and employers must communicate effectively and more rapidly with their employees about their pension scheme. PANRAS can support this as well.
Virtually all pension administration organisations have cooperated in this unique method and in so doing form part of the PANRAS model. A large number of insurance companies have also made cooperation commitments. Virtually all pension administration organisations and life assurance companies are expected to be included in the PANRAS database by the end of 2007.
For more information contact: Diede Panneman.
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Questions or Remarks?
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Watson Wyatt Update, please let us know.
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