A lot has been said and written about the new Pension Act that entered into force last year, but misunderstandings still continue to exist. In the series ‘Pension myths dispelled’ we look closely at one myth at the time. We submit the fourth myth – transitioning equals stealing pension – to Hans van der Meer, strategic policy officer at APG.
In the renewed pension system, participants no longer have pension entitlements but defined contributions. The renewed system no longer promises a specific amount of pension benefits, like in the ‘old’ system, but a fixed contribution will be deposited on your behalf. The sum of the deposited contributions and the achieved return on investment, constitutes the pension assets of the participant. Those assets are used to eventually pay the pension benefits.
Fear founded?
Transitioning means that all pension entitlements - already accrued within the old system - and the pension benefits will be transferred to the renewed pension system. Those entitlements are therefore converted into personal pension assets. Not everyone is assured that this conversion does not come with some level of disadvantage. Some people believe that a part of the pension will be ‘stolen’ this way. That fear partially originates from the fact that the media often emphasize that people cannot object to the transition. To what extent is that fear founded?
Van der Meer: “It is good to know why the transition takes place exactly. Pension funds convert the existing entitlements and benefits into the renewed system to make sure the collectivity of the pension fund can remain intact. Without the transition, a rupture would arise between old entitlements and new entitlements. That would make the pension schemes more complicated and less efficient. The renewed contract works best when all employees participate with their entire pension.
The same applies to the current contract by the way. A pension fund is based on collectivity and solidarity, meaning it’s essential for everyone to participate. That is why participation in the pension scheme of an employer is mandatory. It is also the reason why participants cannot object to the conversion of their entitlements and benefits into the renewed scheme.”
The focus upon conversion of entitlements is that pensions already started will not be lowered. Also for employees who have not retired yet, the pension they may expect remains the same as much as possible, Van der Meer says. “The managements of pension funds are doing whatever they can to realize this. And if we look at the current financial situation of the funds, it looks like they will succeed in this objective.”
Strict rules
Van der Meer does exercise some restraint. “Should the financial situation of pension funds strongly deteriorate in the next years, it is possible for the pensions to become lower. However, that decrease will in that case not be caused by the transition, but by the financial situation. Also in the ‘old’ system, the pensions will decrease in such situation.”
So, participants can be confident that no pension will be taken from them? “Yes. At the time of the conversion, the personal assets will be determined for every active participant and for every pensioner. Strict rules apply for the calculation of those assets and De Nederlandsche Bank supervises a proper execution. Participants can be confident that no pension will be taken from them.
All of this means a drastic change of the Dutch pension system. But the transition actually only means that everybody continues to participate in the joint integral pension scheme of the fund.”