Pension Talk - News update week 31

Pension Talk

Published on: 29 July 2020

What is the hot topic in the Netherlands when it comes to pensions? From the news of the turret in The Hague to the kitchen table in Drenthe: we take stock for you on a weekly basis. This time - obviously - the developments regarding the new system.

 

Everyone will benefit

As the Lower House of Parliament has also agreed with the consequential steps, the government, employers and employees are able to further elaborate on the pension agreement of 2019. The new pension system has to be implemented in full no later than 2026. The new agreements focus on the future pension scheme. According to Minister Wouter Koolmees of Social Affairs, that scheme will be beneficial to everyone.

But what was it again the reforms revolve around? A brief update.

 

More honest for young people and small-scale entrepreneurs

The major difference is that in this new structure not the payments are set but the collected pension contributions. That is good news, mainly for young people. They now accrue less pension proportionally compared to their older colleagues, while they pay the same amount of contribution. Young people will benefit more in the future of the investment returns of their pension fund.

How small-scale entrepreneurs are able to accrue a better pension will also be elaborated. It is the intention for them to be able to register voluntarily at a pension fund in their industry.

 

More risks but also more security

The returns on investments will be allocated almost directly to the pensions in the new scheme, instead of to a financial buffer for bad times. That also has a downside: if the economy faces difficulties, the pensions will be lowered sooner. This means the risks for the participants will increase. However, employers will be given more security because they know exactly what amount of contribution they have to pay.

 

No more fuss about coverage ratios

The major advantage of the new structure is the absence of any discussions about the (low) actuarial interest used to calculate fixed pensions. Also the coverage ratios that are constantly decreasing and increasing depending on the economic developments cease to exist.

 

How about the accrued pension rights?

The government, the employers and employees have agreed that all the accrued pension rights will be combined with the entitlements accrued under the new rules. The way in which this takes place, still has to be elaborated. This also applies to the compensation for older employees by the way, who will accrue less pension in the future.

 

Threat of reduction not over yet

Agreements still have to be made on handling the low coverage ratios (the ratio between the money funds have in cash and the money they need to be able to pay the pensions) applicable to many pension funds at the moment. The risk of pensions being reduced in the meantime still exists.

 

State pension age rises less quickly

The state pension age is rising more slowly as of 2024. Instead of 12 months, it rises with only eight months for every year we - on average - are expected to grow older.

 

No indexation for now

Inflation correction of the pensions will not be applied in the near future. As long as the current pension scheme is into force, reductions continue to be possible, says Minister Koolmees in an interview with the newspaper Algemeen Dagblad. He points out that many pension funds are up to 20 percent below the required coverage limit of 110 percent due to the current low interest rate. Indexation will only be possible above that limit.

Pensioners fear for major pension reductions during the transition period towards the new pension scheme. Senior citizens’ organizations are therefore calling for a transition scheme reducing the chance of this happening.

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Pension

Collection in Income