Watson Wyatt Update, March 2008
Number 3, volume 11
In this Watson Wyatt Update:
With effect from this month, Watson Wyatt Update is going to be organised in a different way. Our website www.watsonwyatt.nl/update will keep you informed of the latest developments, with articles being published directly on the site. The monthly newsletter will then become an anthology of the articles that appeared on the website during the preceding weeks.
The process behind the continuity analysis
Consultations with the Dutch Central Bank (DNB) revealed that in nearly all cases where continuity analyses had been submitted to DNB, there was no covering letter from the pension fund board. DNB wants to have insight not only into the analysis results, but also into the process preceding the eventual analysis. In particular, the description of this process should address the role of the pension fund board itself. The board could indicate, for example, how and on what grounds the (economic) assumptions were determined. DNB is also interested in the choice of stress tests and in the influence of any earlier variants of the continuity analysis or an ALM study on the policy choices. In addition, the board is expected to indicate how it values the different aspects of the eventual results, and what standards were applied in that context.
From now on, Watson Wyatt is going to remind pension fund boards of the importance of this covering document that sets out the process behind the continuity analysis. Although this task can only be carried out by the board itself, we would obviously be happy to provide assistance in this respect. The same applies to funds that have already performed a continuity analysis. If they submitted the results to DNB without a description of the process, they still are expected to supply such a description.
For more information contact: Wichert Hoekert.
Top of page
Draft decree on the WGA shortfall
Minister Donner has proposed, in a draft decree, that the Pensions Act be amended in such a way that the so-called WGA shortfall is covered by the term ‘disability pension’. This is a response to the recurring debate on the extent to which the Pensions Act still allows pension funds to administer a supplementary disability pension scheme. DNB took the position that the Return to Work (Partially Disabled) Regulations (WGA) constituted a combination of a disability provision and an unemployment provision, concluding that pension funds were not allowed to administer WGA shortfall cover as part of the pension scheme. The draft decree has put an end to this debate.
The Minister has denied that the WGA is primarily unemployment insurance. The benefits paid under the WGA depend on the extent to which the employee utilises his/her remaining earning capacity. The more the employee works, the higher the benefits will be (the ‘it pays to work’ principle), which means that the WGA provides an incentive to keep working. Both the Association of Insurers and Mr Kalkman (professor of insurance law at the University of Amsterdam) have meanwhile responded to the draft decree. The Association indicated that, in its view, this does involve cover for the unemployment risk because the entitlement to benefits is only obtained in situations where partially disabled employees can insufficiently utilise their remaining earning capacity. Professor Kalkman also believes that WGA shortfall insurance contains a significant unemployment component because it by no means involves cover for ‘circumstances inherent to the person’. In their opinion, the draft decree is both uncalled-for and undesirable. Watson Wyatt also considers the decree to be unnecessary. In our view, even without the decree, a pension relating to (partial) disability that takes account of the WGA can already be classified as a disability pension in conformity with the Pensions Act. On this basis, both pension funds and life insurers should be allowed to administer such a scheme. After all, entitlement to WGA benefits is primarily conditional on occupational disability rather than unemployment.
The draft decree prohibits the widely-used traditional schemes which provide a supplement up to a fixed percentage of the wages last earned, whereby the extent to which the sick employee still works is irrelevant. According to the draft decree, pension funds may cover the following variants in respect of disability pension:
- supplements to WIA benefits relating to full disability and supplements to WIA benefits paid to partially disabled employees who fully utilise their remaining earning capacity;
- supplements to WGA follow-up benefits and to WGA wage supplements that do not depend on the degree of utilisation of the remaining earning capacity;
- a higher supplement (bonus) to follow-up benefits than to wage supplement benefits, provided that this supplement to the said benefits does not decrease as the partially disabled employee does more work.
The Government wants the decree to enter into force on 1 January 2009, in order to give employers’ organisations the opportunity to amend their disability pension schemes where necessary. To prevent a continuation of the present ambiguity until that time, the decree provides for a transitional measure whereby supplements to WIA benefits not covered by the term ‘disability pension’ are nevertheless classified as a disability pension. We will keep you informed of further developments.
For more information contact: Sandra Bertram.
Top of page
Cost provision
Since the Pensions Act entered into force, Watson Wyatt has tried to refine the method for making cost provisions for the funds it advises and certifies. Among other things, this refinement is based on a passage in the Financial Assessment Framework Decree. The passage in question stipulates how the technical provision should be determined: not on the basis of the pension commitments accrued up to the date of determination, but on the basis of the cash flows that are expected to result from these commitments (Part 2, Section 2(1)). Because the cash flows resulting from the commitments also comprise the costs, the technical provision should include a cost provision.
The method applied by Watson Wyatt in determining the cost provision as part of the technical provision can be outlined as follows. The costs for which a provision should be in place on the date of determination should (at least) comprise the foreseeable costs if the fund sponsor were to withdraw. In that case, all the costs of paid-up policies, retirement and payable pensions would still arise, as would the annual costs. Watson Wyatt assumes that all cost items will increase annually in line with the rate of inflation.
Even if the fund’s contribution flow continues as normal, such a cost provision presents the most logical picture in terms of solidarity. After all, this method ensures that when a member leaves his/her employer’s service or retires, sufficient funds have already been reserved to defray all future costs as well. If this is not the case, the costs arising after the employee’s departure or retirement should be paid from subsequent contributions or disposable capital.
For more information contact: Wichert Hoekert.
Top of page
New decree on international aspects of pensions – Part 2
(Part 1 can be found on www.watsonwyatt.nl/update)
Value transfer from abroad
In the Decree of 31 January 2008, no. CPP2007/98M (International aspects of pensions), the State Secretary for Finance provides, for the benefit of incoming employees, for an instruction as well as approval in the context of settling a value transfer from abroad. The said decree replaces the Decree of 17 January 2002, no. CPP2001/3181M.
The instruction is required because, when a transfer is made from a foreign pension administrator to a Dutch pension scheme, a strict application of the Wages and Salaries Tax Act 1964 and the regulations based on it may cause the entire Dutch pension entitlement to become inconsistent with the requirements concerning tax advantages. After all, the aforesaid Implementing Decree does not provide for transfers from a foreign pension administrator that are based on years of service spent abroad. Because this is an undesirable situation, the pension scheme will nevertheless be regarded as a pension scheme within the meaning of the Wages and Salaries Tax Act 1964 if certain conditions are fulfilled. The pension capital should be transferred directly to the Dutch pension insurer. The pension entitlements awarded by the Dutch employer should not exceed the equivalent of the transferred capital while the scheme should continue to satisfy the applicable provisions of the Wages and Salaries Tax Act 1964 in all other respects after the value transfer. This instruction is a collective instruction. As long as the conditions are fulfilled, there is no need to submit a request for an instruction.
The approval concerns the situation in which a person temporarily worked abroad while continuing his/her pension scheme in the Netherlands. This person was often not eligible for a tax exemption (deferred taxation system) or contribution rebate in the other country. When receiving pension benefits after his/her return to the Netherlands, he/she will be confronted with double taxation. After all, the benefits will be taxed as normal. However, if the taxpayer can demonstrate upon request that he/she effectively paid tax in the past which is equivalent in nature and purport to wage tax or income tax (including the lack of a contribution rebate), part of the pension benefits may be disregarded for wage tax and income tax purposes. In point of fact this involves a reintroduction of the ‘balancing method’ (saldomethode) which ceased to exist in statutory terms when the Income Tax Act 2001 was introduced. Tax will only be levied on the amount of pension benefits in excess of the amount for which no tax exemption and no contribution rebate was obtained in the past. Therefore, these employees will have to keep meticulous records of their tax affairs during the period in which they are living abroad.
For more information contact: Eric Heemskerk.
Top of page
Announcement seminar ‘Identifying and controlling pension risks’
On Tuesday, 22 April Watson Wyatt is going to organise a seminar entitled ‘Identifying and controlling pension risks’. Further information on this seminar can be found on our events page.
Questions or Remarks?
If you have any questions or remarks concerning this issue of the
Watson Wyatt Update, please let us know.
Top of page
Disclaimer: "Hoewel wij ernaar streven om correcte en actuele informatie te verschaffen, kunnen
wij niet garanderen dat de informatie juist is op het moment waarop deze ontvangen wordt of dat de
informatie na verloop van tijd nog steeds juist is. Op grond van de informatie dienen derhalve geen
acties te worden ondernomen zonder voorafgaand deskundig advies."
© 2008 Watson Wyatt B.V. Alle rechten voorbehouden.
| 
