Pension definitions

Everyone in the Netherlands has the possibility to save for additional pension in a fiscally attractive way. We call that individual additional pension. Or: the third pillar of the pension system. Individual saving is possible by means of, for example, annuities, single life premiums and life insurances.

The AOW (General Old Age Pensions Act) forms the first pillar of the Dutch pension system. Everyone living or working in the Netherlands, automatically accrues AOW (state pension). It is a basic income to make ends meet. The new rules on pension are also affecting the AOW (state pension). A law was adopted on January 1, 2020, making the AOW age (state pension age) rise less quickly.

An agreement has been made that, in the new system, every participant is allowed to withdraw up to 10% of his/her pension money at once. This withdrawal can be made on the retirement date. The current contract will most likely already provide this option as of 01-01-2023. This is part of the legislative proposal 'Lump sum payment, early retirement scheme and leave savings'.

The coverage ratio of a pension fund indicates the level of assets the fund is managing in relation to the number of pension payments it has to provide. The coverage ratio is an indication as to whether a pension fund is able to pay the pensions now and in the future. The coverage ratio is calculated by adding up all assets of the fund and to then divide this amount by the pension liabilities (the pension entitlements of all participants together). The coverage ratio is expressed as a percentage.

One of the two contract types in the new pension system. This is the contract type offering the most flexibility and freedom of choice. This contract type has more individual features, such as lifecycle investing, and people are able to opt for a solidarity reserve.

Indexation is often used in relation to an increase of pensions. It means that the accrued pension and the pension payment are increased upon indexation in line with the price increases in stores and the development of wages.

Transition is the transfer of your pension rights and entitlements to the new scheme. When switching to the new scheme, it means that the accrued pension assets are divided into personal pension assets for all people who participate in the new system.

In case of lifecycle investing, every age has a different investment mix with the fixed feature that the investment risk decreases as you get older. Younger people are able to assume more risks than older people and that's the reason why they invest a larger percentage of their assets.

The accrual phase is the period during which you accrue pension. About 45 years of pension is accrued on average in the Netherlands. This is the time at which you start working until you retire.

This is often called the second pillar of pension accrual. Approximately 90% of all employers offer an additional pension scheme to employees. In most cases, employers pay about ⅔ of the pension contribution. The employee pays ⅓. Pension funds manage and invest the deposited money. They later pay out the pension someone has accrued. This is an addition to the AOW (state pension).

Pension contribution is an amount paid to the employer during an agreed period (usually monthly). These amounts are used to accrue pension. In most cases, the employer pays ⅔ of the contribution and the employee pays ⅓ of the contribution. The pension fund invests the deposited money.

A contribution scheme is also referred to as a DC scheme (Defined Contribution scheme). This is a pension scheme in which only the contribution of the employer is determined. The amount of the pension payment is highly dependent on the returns. The pension schemes in the new pension system, the Solidary Contribution Scheme and the Flexible Contribution Scheme, are DC schemes.

RVU stands for Regeling voor Vervroegd Uittreden (Realy Retirement Scheme). The Netherlands provides for the possibility to stop working sooner. The RVU levy is the final levy the employer pays if an employee retires early.

Social partners is another word for employees and employers. Employers are represented by employers’ organizations. Employees are represented by trade unions.

One of the two contract types in the new pension system. This is the most solidary contract type with more collective features (such as a unified investment mix) and more freedom of choice. This contract type also has a solidarity reserve included by default.

The solidarity reserve is a type of collective buffer a fund can utilize to compensate major shocks for a participant or group of participants. That's a way for us to distribute the risks as fairly as possible between current and future generations. The money for this “reserve pot” is derived from the contributions and/or from the excess return. The current scheme does not include a solidarity reserve. A solidarity reserve is however included in the Solidary Contribution Scheme, one of the possible new contracts. And in the Flexible Contribution Scheme (the other possible contract) the inclusion of a solidarity reserve is offered as a choice. The social partners make that decision. A pension fund has to establish the rules for accrual and distribution of the reserve in advance and for an extended period of time. The addition to the reserve can amount to a maximum of 10% of the contributions amount and/or 10% of the excess return.

The payout phase is the period during which the accrued pension is paid. This means the payout phase starts when you retire.

A benefit plan is also referred to as a DB plan (Defined Benefit plan). This is a pension scheme in which the pension payment (how much pension you will receive in the future) is defined in advance. The new pension system does not include any DB plans anymore, but we switch to DC schemes.

A trade union is an association of employees to look after the interests of employees. The most well-known trade unions in the Netherlands are the CNV and the FNV. They often talk to the government or parties like pension funds on behalf of the Netherlands’ working population.

The Dutch government believes it to be important for everyone to receive pension. Everyone living or working in the Netherlands will receive AOW (state pension) later on. In addition, you often also accrue pension through your employer. Most employees are covered by a certain industry-wide pension fund. Civil servants (education and the government for example) are covered by ABP, window washers and cleaners are covered by BPF Schoonmaak and bpfBouw is the pension fund for people working in construction. Some professions have their own occupational pension fund specific to those professions (medical specialists, general practitioners and dentists for example). In addition, some companies also have their own staff pension fund. And there are also employers that are not subject to mandation and that have their pension scheme executed by an insurance company.

An employers’ organization is an organization for employers. Employers join such organization to make sure their interests are looked after. Well-known examples are VNO-NCW or MKB-Nederland.