Netherlands publishes proposal to revamp DC pension scheme rules 

As part of the proposal by the Dutch Government, respondents had until February 12 to submit their feedback on the “Pensions Future Act”, which resulted in more than 800 responses.

The draft law is set to enter into force on 1 January 2022 with a transition period lasting 4 years. On May 10, it was announced that more time is needed and that the new law will come into force by 1 January 2023 at the latest. The four-year transition period to the new system will be delayed correspondingly, meaning it is now expected to end at the latest on January 1, 2027.

• All new entrants to pension plans must be on a defined contribution (DC) basis with a fixed (i.e. non-age-related) contribution rate. There will be two types of contracts possible for these defined contributions.`

• New defined benefit plans (DB) with an insurer and moves from a DB plan currently financed by a pension fund to new age-related DC schemes, are not permitted once the new law is in force (i.e. from the beginning of the transition period).

• After the end of the transition period, any existing members of either DB plans financed through an insurance contract, or DC plans with an age-related scale, may remain in these plans. They may continue to earn future benefits based on an age-related defined contribution scheme until they leave company service. However, any such defined benefit promises must be changed to be defined contribution (this may be age related) in respect of service after the end of the transition period.

• The contribution in the pension plan is in principle capped at 30% of the pensionable salary for the transition period and the first 10 years afterwards. During this period the cap will be increased by 3% to 33% to allow for the cost of any compensation required due to the transition.

• Accrued defined benefit rights must, in principle, be converted to the new pension contract. This only applies to pension funds, not to insured plans. If social partners have reached an agreement about the conversion, a request must be submitted to the pension fund. If the conversion leads to a disproportionate disadvantage for (a part of) the stakeholders, the pension fund may, after consultation with the social partners, decide not to convert.

• In the new contract, any partner’s or orphans’ pensions that become due before the member’s retirement date will be on a risk-only basis and will no longer depend on the years of service. The partner’s pension on a risk basis will be capped at 50% of the member’s pensionable salary. 

• Social partners (i.e. the parties to the pensions agreement) will need to agree on the details of the new plan including a transition plan within 2 years of the start of the transition period. The transition plan will determine whether past benefits accruals will transfer to the new benefit structure and if so, must detail how this transition will be structured. This is especially important in case the benefits are provided using a pension fund. Mediation by an external transition committee may be requested.

•  Pension providers including all pension funds must file an implementation and a communication plan within 30 months of the start of the transition period setting out how each plan will comply with the move to the new pensions contract.

• The funding rules for pension funds in the meantime have been relaxed in order to facilitate the transition.  However, the plan must transition to the new system, if use is made of the relaxation.

We believe that this legislation will revolutionize the Netherlands pensions market. We expect this change will be a catalyst for many employers to look to switch accrued defined benefit obligations to defined contribution plans for the future, not least in order to reduce risks and to maintain equity between current and future generations of employees.

Making such a change will require careful planning, negotiation and management in order to ensure fair treatment of employees and to find the right balance between the needs of the different stakeholders. Depending on whether the past accrued benefits are also taken into account in the transition, the impact on accounting can also be significant.

There is likely to be continued debate around the changes, and the detail is subject to change especially due to the changed timing and the numerous responses to the proposals. A further source of political uncertainty is the election of a new Government in March.