Pension premiums to be increased again: what now?
This year saw an increase in the monthly premium due for most pension plans. The higher premiums meant the accrual of a pension got more costly for both employers and employees, which could have resulted in fierce discussions within organizations. And pension-related costs are likely to be even higher in 2022, as a further increase in pension premiums cannot be ruled out. What options do you have as employer to cut some of these additional costs?
First, it is good to know that it is primarily employees with a ‘middelloonregeling’ (a pension plan where the height of the pension is determined by the average height of a person’s salary in their lifetime) whose monthly pension premium will further increase in 2022. Employees with a ‘beschikbare premieregeling’ (a pension plan where the height of the pension is determined by the height of the contributions) will not immediately see any changes. For them, however, the increase will become apparent once their pension is turned out to them upon retirement: they will receive less in pension.
In short, the costs of a pension plan for your organization are determined by the following three factors:
- the workforce;
- the nature of pension commitments;
- the rates used by the pension insurers or pension fund.
Because it is virtually impossible to exert any influence on the workforce and the rates used by the pension providers and funds, there is only little you can do about increased pension-related costs for your organization. Still, you could take the following actions, either separately or in combination with each other:
- economizing the pension plans;
- switching to a pension fund for the management of the pension plans;
- offering employees a ‘premieregeling’ (a pension plan in which the course of pension premiums due is predetermined) only.
Economizing pension plans is possible through, for example:
- reducing the rate of accrual;
- increasing the employee’s contribution to the pension premium (and thus decreasing the employer’s contribution);
Pension insurers are legally obliged to guarantee employees their insured pension (i.e. a pre-determined amount in pension). Pension funds, on the other hand, have no such legal obligations. Instead, the latter can implement pension cuts if needed – although such cuts are always a last resort measure. Switching to a pension fund, where there is no legal obligation to turn out a pre-determined mount in pension and pension cuts are permitted, can easily save your organization up to 20% in pension-related costs.
The most frequently selected option for reducing pension-related costs for organizations is offering employees a ‘premieregeling’ only as their pension plan. This pension plan does not involve a pre-determined pension amount, but instead the course of the monthly premium due (i.e. employee’s and employer’s contribution) is pre-determined. This does, however, mean that employees are uncertain about their eventual pension accrual. The question is at what percentage the premium should be set. There is a wide choice in (age-dependent) premium sliding scales based on different actuarial interest rates. Nonetheless, calculations will be necessary to establish the positive and negative differences between the value of an employee’s current and new pension plan. These differences can then be made visual through a graph, such as a scatterplot (or scatter graph). This will show to all employees anonymous data on the differences between their current and new pension plans. A compensation scheme (i.e. a salary supplement) may be required for those employees who are disadvantaged by the switch to a new pension plan.
Your organization may have to pay double the current premium
The main cause for the increase in pension-related costs is the very low interest rate at the moment. This low rate results in a lower-than-expected pension obtained from the return in premiums paid, meaning a higher premium must be paid to ensure the pension. The last 20 years have seen a clear tendency for an overall decrease in interest rate.
Market interest rate
If by the end of 2021 the market interest rate is still equal to the current rate and a pension agreement you have entered into with a pension insurer comes to an end, the premiums to be paid by your organization may suddenly double:
increase in life expectancy 10% actuarial interest rate from 3.0% to 2.5% 20% pension increase in relation to lower market interest rate 70% total increase in premiums 100%
The premiums can even increase for pension plans managed by pension funds. In this case, the increase is caused by the stricter actuarial interest rates used by funds to arrive at a cost-effective premium.
Depending on the situation, you may alter the content of a pension agreement. There are three situations we will discuss here, which may occur in combination with each other if your organization is made up of multiple departments and/or gives its employees a choice between different pension plans.
Industry-wide pension fund
For some organizations operative in certain industries, it is mandatory to have their pension plans managed by an industry-wide pension fund, called ‘bedrijfstakpensioenfonds’ (BPF) in Dutch. In that case, your organization has in principle no say in the content of pension agreements. There are two exceptions to this rule, in which case your organization does have a (partial) say in the content of the pension agreement:
- if an employee also takes out a supplementary pension in addition to the industry-wide pension plan;
- if the management of the industry-wide pension plan is transferred to a pension insurer.
Collective labor agreement
Sometimes, a collective labor agreement also lays down certain stipulations for pension plans. This is only the case if it is not mandatory for the organization in question to have pension plans managed by an industry-wide pension fund. The stipulations in the collective labor agreement also determine to what extent your organization has a say in the pension agreements. In the event of a company-specific collective labor agreement – which only applies to your organization and its subsidiaries – your organization has the full right and power to make changes to pension plans. Such a company-specific collective labor agreement is more in line with situation 3 (to be discussed below). Make sure to involve the works council in any changes made to pension plans. In addition to the works council, trade unions must also always be involved if a company-specific collective labor agreement applies.
This situation occurs if there is no industry-wide pension fund and/or no stipulations on pension plans laid down by the collective labor agreement. In this situation, your organization has full power to determine and change the content of pension plans. However, you still need the approval of the works council and/or employees for any changes. This means you must take the following steps:
- inform the works council of the planned changes to pension plans;
- discuss matters with the works council;
- the works council must approve the planned changes;
- inform your employees;
- finally, the employees must approve the planned changes.
If changes are made due to financial problems, it must first be established whether or not those problems are only temporary or will be permanent if pension plans are not adjusted. Make sure to have an accountant or auditor check the figures for a second opinion. Only in the event an organization suffers from exceptional financial problems can pension plans be changed without the approval of employees being required. The approval of the works council is always required.
Arrangement for the transition to the new pension system
To facilitate the transition to the new pension system and avert the situation in which employees lose on pension money as a result of the transition, there will probably be transitional arrangements implemented for the following pension plans (existing on December 31, 2022):
- ‘Beschikbare premieregeling’ (a pension plan where the height of the pension is determined by the height of the contributions) with an (age-dependent) premium sliding scale.
- ‘Middelloonregeling’ (a pension plan where the height of the pension is determined by the average height of a person’s salary in their lifetime) and ‘eindloonregeling’ (a pension plan where the height of the pension is determined by the height of a person’s final salary prior to retirement) managed by a pension insurer. Until January 1, 2027, these pension plans may be converted into a ‘beschikbare premieregeling’ with an (age-dependent) premium sliding scale.
If you use the transitional arrangements, any employees with the above pension plans who entered into employment before the start of the transition period (i.e. January 1, 2023) can continue to use their pension plans until leaving employment / retirement. Employees hired on or after this date must by 2027 have a ‘premieregeling’ (a pension plan in which the course of pension premiums due is predetermined) where everyone – regardless of age – pays the exact same percentage in premium (the so-called ‘vlakke premie’ in Dutch) in accordance with the new pension system.
The transitional arrangements do not apply to a ‘middelloonregeling’ managed by a general pension fund (called ‘algemeen pensioenfonds’ in Dutch) or an industry-wide pension fund (called ‘bedrijfstakpensioenfonds’ (BPF) in Dutch). If you voluntarily chose to have pensions managed by either of these funds and thus have no legal obligation to do so, it may be wise to switch as soon as possible – at least before January 1, 2023 – to the aforementioned ‘premieregeling’. The transitional arrangements do apply to this pension plan, meaning you can avert the situation in which your employees are disadvantaged by the transition to the new pension system and demand a compensation scheme for their loss in pension.
Another topic relevant to the issue of increased pension-related costs is the transition to the new pension system, scheduled to start on January 1, 2023. In short, the transition to the new pension systems involves a mandatory conversion of all current pension plans to a ‘premieregeling’ (a pension plan in which the course of pension premiums due is predetermined) where everyone – regardless of their age – pays the exact same percentage in pension premium (the so-called ‘vlakke premie’ in Dutch). This means there will no longer be a gradual increase in pension accrual over the years but instead a gradual decrease in accrual as an employee approaches retirement age. A compensation scheme may be required for those employees who are disadvantaged by the switch to the new pension system. There are transitional arrangements in effect during the transition period to facilitate the conversion to a ‘premieregeling’. By using these arrangements, you may be able to avoid having to enter into a compensation scheme with employees.
Clearly, the increase in pension-related costs for your organization is a complex issue, requiring you to map out in time what your options are. Depending on the situation, you have several options to avoid the increase in these costs. However, approval by the works council and employees is required and the consequences of any changes will be different for different (groups of) employees. Only by having an eye for their interests can you make the right decisions.