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In this Watson Wyatt Update:
The purpose of the Dutch Act on Several Adjustments to the Pensions Act, the Occupational Pension Schemes (Obligatory Participation) Act and Several Other Acts (Wet Enige wijzigingen in de Pensioenwet, de Wet verplichte beroepspensioenregeling en enige andere wetten (‘the Adjustments Act) is to correct a number of technical shortcomings in the Dutch Pensions Act (Pensioenwet). This article presents a general discussion of the amendments proposed in the Adjustments Act. As matters stand, the Adjustments Act has bill status, and will probably come into force after 1 January 2008.
The Adjustments Act is to introduce two amendments that will have retroactive effect from 1 January 2007:
Pensioner participation in company pension funds
The Adjustments Act proposes that a clause be introduced under which written consultation of pensioners is declared inapplicable in situations in which the fund introduced a members’ council or a board on which pensioners are represented before 28 February 2003 (the date of the second participation agreement), and if the company pension fund can demonstrate that the form of participation that has been realised has the approval of the pensioners.
Reduction provision in situations involving coverage deficits
In the case of coverage deficits, pension funds may, as an ultimum remedium, reduce pension claims and rights in order to restore their financial health (Section 134 of the Pensions Act). In such situations, the fund must also draw up a short-term recovery plan, in accordance with Section 140 of the Pensions Act. The amount of time that such plans may cover was expanded from one year to three years during the Parliamentary discussion of the Pensions Act. As such, the Adjustments Act proposes following Section 140 and extending the deadline for recovery specified in Section 134 to three years.
Other amendments to enter into effect at a time to be determined by Royal Decree:
Waiting period/threshold period
Section 14 of the Pensions Act states that acquisitions of pension claims may be deferred for up to two months at most (the waiting/threshold period). However, in the temporary employment agency sector, this results in insurmountable administrative problems. The difference between this and other sectors lies in the primarily short durations of employment. The administration charges for the pension administrators are considerably higher, and most of the members (98%) do not reach the commutation limit, and as such will ultimately not accrue any pension rights. Consequently, the government feels that the short duration of employment in the temporary employment agency sector justifies an exception to the waiting period, and will extend the period to a maximum of 26 weeks.
Commutations of small partner pensions and orphan pensions
The Adjustments Act provides for an amendment to Section 67 of the Pensions Act, specifying a possibility for pension administrators to commute partner pensions, as well as other pension rights, if the benefits from the partner pension are less than €400. The legislature has opted to replace the phrase ‘other pension rights’ with ‘orphan pension’ in the Adjustments Act. Another proposal is to abandon the links to partner pensions and allow commutation of orphan pensions. Commutation of orphan pension after six months after the commencement date will also be possible if the annual benefits are less than €400 and if the orphan approves. If the orphan is underage, approval may be granted by the orphan’s legal representative.
WGA gap/Occupational disability pensions
As matters stand, it is unclear to social partners how disability pensions are to be structured in order to allow them to be administered by pension funds. In order to remove the confusion, the Adjustments Act proposes creating a foundation for regulations to be introduced by governmental decree, based on which supplementary benefits under the Dutch Work and Income (Capacity for Work) Act (Wet werk en inkomen naar arbeidsvermogen) can be designated as occupational disability pensions as meant in the Pensions Act. This solution is contingent upon the governmental decree and on how it manifests in practice. However, in the Parliamentary discussion of the Adjustments Act, the government explained its views on how pension funds should administer pensions to cover gaps under the Dutch Regulations on Work Resumption (Partial Disability) (Regeling werkhervatting gedeeltelijk arbeidsgeschikten, ‘WGA’).
Covering partner pension during unemployment benefit
Section 55(5) of the Pensions Act specifies that members who receive benefits pursuant to the Dutch Unemployment Benefits Act (Werkloosheidswet), after termination of their membership, retain cover for their partner pensions if their pension schemes provided for a risk-based partner pension. The Adjustments Act adds the provision that such cover is also retained for unemployed frontier workers and seasonal workers who receive unemployment benefits from their countries of residence immediately following termination of their membership.
Coexistence of members councils and board representation
Pursuant to Section 101 of the Pensions Act, with company pension funds, the pensioners must choose between board representation and a members council. As matters stand, Section 101 does not offer sufficient opportunity to continue limited board participation alongside a members council in situations in which such board participation does not meet the requirements for the relative apportionment of seats between members and pensioners. The Adjustments Act includes a provision that states that representatives of pensioners may occupy fewer seats than members’ representatives if pensioners opted for a members council when consulted, and if the pensioners’ representatives already occupied seats on the board prior to that consultation.
Releases of solvency
The Adjustments Act extends the validity of the transitional arrangement for releases of solvency mark-ups for pension funds who deduct the solvency releases from their premiums without reaching the limits for premium discounts. The purpose of this amendment is to prevent unwanted abrupt increases in costs as a result of the abolition of the original transitional arrangement. The extension until 1 January 2009 offers funds sufficient time to implement the necessary procedural and administrative measures to adapt their financial policies to match the Pensions Act. It is possible that this will result in increases in premiums by such a degree that proper mitigation is impossible. In this connection, the Dutch Central Bank may introduce further, more specific measures to prevent unwanted effects resulting from excessively abrupt and major increases in premiums. Such further measures will remain applicable for at most five years after 1 January 2009.
For more information contact: Pauline Bakker.
Starting 1 January 2008, transfers of accrued benefits will no longer be calculated using a non-variable interest rate of 4%, but instead will be based on the market interest rate. The Dutch Regulations on the Pensions Act (Regeling Pensioenwet) specifies that the market interest rate in any given year is the same as the interest rate as at 1 October of the preceding year for obligations with a 25-year term to maturity. The term structure published monthly by the Dutch Central Bank serves as the reference value, which is known as the ‘Financial Assessment Framework term structure’ and is based on the swap curve. Based on this term structure, the 25-year interest rate as at 1 October 2007 was 4.926%.
The purchase rates from insurers applying a guaranteed interest rate of 3% may be up to 60% higher than the transfer values based on this market interest rate. This means that employers who have assigned their pension schemes to insurers and who are faced with incoming transfers may be faced with such costs. Conversely, similar amounts will be released to the employer in the case of outgoing transfers. Both of these effects already existed with transfers of accrued benefits at an actuarial interest rate of 4%; however, the application of the market interest rate will cause them to almost double in volume during 2008. Although the problem has been recognised by the government and umbrella organisations for pension funds, an acceptable solution has proved elusive. Over time, the introduction of Solvency II – when insurers will also be required to use market values – should provide a solution.
For more information contact: Wichert Hoekert.
Is our pension scheme in line with what the market offers? This is a question regularly asked by our business relations. In the past, the answer was very clear: 70% of the worker’s final pensionable salary from the age of 65, and before that age an early retirement or pre-pension scheme. In recent years, however, the world of pensions has undergone a great deal of change. Almost all final-pay schemes have been converted into career-average schemes or defined contribution schemes, in which investment risks and supplements have become important factors. Moreover, 70% of the final pensionable salary is now far from being the norm. The wide range of choices means that it is currently very difficult to properly compare pension schemes. For this reason, Watson Wyatt has spent the past few months preparing a Benchmark for Pension Schemes that employers and employees can use to see how their pension schemes compare with the rest of the market.
Structure of the survey
The Benchmark for Pension Schemes compares the data of a substantial proportion of our business relations (in total, some 250). In each case, five factors were examined to determine what an employee may eventually expect from the pension scheme. Finally, the results of the separate factors were compared for the pension schemes included in the benchmark. For example, we considered what pension benefits the employees may expect, and how the pension scheme is financed. The policies for granting supplements were also examined, and finally we measured the funds available for the future benefits.
Reports
The results for the pension schemes eventually included in the benchmark were determined, both with regard to the separate comparison factors and at the overall level. The benchmark reports use graphs to rate each particular pension scheme for each factor. This allows readers to see what percentage of the pension schemes examined is better or worse for a particular factor, or overall. Further information is available at www.pensioenbenchmark.nl.
For more information contact: Ester Lamerikx.
The staff of Watson Wyatt would like to wish you a Merry Christmas, a Happy New Year and the best of health in 2008. This year, we once again decided not to send any Christmas cards to our business relations, but to donate the money saved to the Liliane Fonds charity. The Liliane Fonds is a special charity for handicapped children in developing countries.
If you have any questions or remarks concerning this issue of the Watson Wyatt Update, please let us know.
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