Compensation schemes lead to the use of non-retroactive effect.

The recent document with questions from the Dutch House of Representatives about the new system and Minister Schouten’s answers to those questions may raise some eyebrows.

By Berry van Sonsbeek, Product Marketmanager Zwitserleven

Let me limit myself in this blog for a minute to compensation schemes that should also apply to new employees going forward. The Minister argues that if there is a compensation scheme, it should also apply to new employees. Irrespective of whether compensation will be paid as part of the pension scheme or outside it.

Until about a month ago, there were conflicting stories going around in the market about compensation schemes and whether those schemes should also apply to new employees in all cases. The notion was that if compensation were linked to salary payments rather than pensions, it did not need to apply to new employees. At least the Minister’s answers to the questions have cleared things up.

Impact on advisory processes

What do I think will be the impact on advisory processes for the transformation of current pension schemes in line with the new system?

The fact that compensation should also be given to new employees has created additional uncertainty about future employer expenses. This will give rise to major dependence on the influx of new employees, which will make it easier to steer discussions towards using the non-retroactive effect. Aside from the adjustments to be made for surviving dependants’ insurance, you can continue to use the increasing graduated scales for the current population. For new employees, however, a flat premium will eventually have to be agreed upon. In principle, no compensation scheme needs to be agreed in that case.

In other words, current participants will not be worse off. And new employees will get a flat premium derived from what is agreed to be a good pension that an employee can look forward to at the employer.

For schemes administered by pension funds, the provision on non-retroactive effect does not apply. Unless this scheme is converted to a pension scheme with an insurance company or a PPI before 1 January 2023. This means that there will be compensation schemes at pension funds.

Employees who are covered by a compensation scheme in the transition phase lose the right to compensation if they move to an employer that availed itself of the non-retroactive effect. With that shift, they will then transfer to a flat-premium scheme. Older workers in particular will be worse off in terms of pension accrual.

The question is whether this will have an impeding effect on the labour market – even though one of the goals is in fact to introduce a system that moves in line with labour market developments, as people no longer spend their entire working lives with one and the same employer. In any case, it is something that employees should be aware of when considering moving to a different employer.

Conclusion

The fact that compensation schemes should also apply to new employees is in my estimation a reason to try and use the non-retroactive effect in schemes that are currently administered by an insurance company or PPI.

Further, employees should be properly informed when moving to a new employer. About their pension situation and the consequences of a change of employer.

Annex: quotes of some relevant questions and answers between the Dutch House of Representatives and Minister Schouten as published in May this year.

Question:
The members of the CDA group note that there will also be compensation for new employees and would like to ask whether this could mean that, if the compensation scheme is not included in the pension scheme itself, the tax allowance for compensation is not the same for all participants in pension schemes.

Answer:
In conformity with the proposed Article 150f(1)(a) of the Pensions Act, employees entering the service of an employer are entitled to the same compensation scheme as applies to current employees. As a consequence, employers are not at liberty to agree any other type of compensation for new employees entering their service. This means that when an employer puts in place a compensation scheme within the pension scheme, the same arrangement also applies to new employees. The tax allowance is therefore also the same in all cases. If the compensation is provided outside the pension scheme, this compensation too should be given to new employees. In the transition plan, the employer must lay down how compensation will take place. The proposed Article 150f applies to all compensation schemes, regardless of the type of pension provider that administers the pension scheme.

Question:
The members of the CDA group would like to ask whether it is realistic to expect that, if compensation to future employees will be compulsory, compensation will take the form of a salary supplement, which will somewhat limit the increase in pension costs for employers. They would also like to ask what consequences this will have for employees and whether they will not be restricted in terms of tax allowance as they cannot use the entire compensation amount towards their pensions.

Answer:
In conformity with the proposed Article 150f(1)(a) of the Pensions Act, employees entering the service of an employer are entitled to the same compensation scheme as applies to current employees. As a consequence, employers are not at liberty to agree any other type of compensation for new employees entering their service. The government would like to see compensation being kept within the pension scheme as much as possible, as this will ensure its allocation as pension. However, employers may also agree on compensation outside the ‘pension’ employment term, for example in the form of a salary supplement. It should be noted here that a higher salary also means that more pension will be accrued.