PensionAgreement, a blessing or a disaster?

21 April 2020

Over the last twenty years the tax legislators have changed the Dutch pension system several times. Originally the retirement age was 65, with a possibility of early retirement through a VUT period. In 1999 the norm in the Dutch Wages Act became a retirement age of 60 years. However, after five years this system was already replaced by a retirement age of 65, combined with several measures to discourage early retirement.

To keep pension affordable in 2014 the retirement age was set to 67 years (the increase of the AOW age was spread over a period of 10 years), and increased in 2015  to 68 years. The main reason for these changes was the constant increase of life expectancy.

Because of the low interest rates the past years, most pension funds are falling short in their provision. The present value of all future pension payments increased way faster than the capital of the fund, due to these low interest rates. This led to pension funds having to cut the pension rights of the participants, in order to meet the coverage ratios set by law. The last years it has been impossible for the funds to increase the pension rights by indexation.

The constant increase of the life expectancy, the low interest rates and the way people perform their labor (without a labor agreement) is the basis for a firm review of the current pension system.  In June 2019 the Dutch Cabinet reached an agreement in principle in order to renew the pension system.

Principles PensionAgreement

The basic principles for the elaboration in the PensionAgreement are:

  • Mandatory pension accrual, that makes sure that a large majority of employees accrue some kind of pension.
  • Collective providing, which ensures low providing costs.
  • Collective risk sharing, which protects the participants from abrupt changes in the financial markets and guarantees a lifelong payment of the pension, regardless of how long somebody lives.
  • Tax support, which encourages saving for retirement.
  • Partner and disability pension, which protects the participants in case of death or disability and which is an important part off the pension system.

Design PensionAgreement

The principles mentioned above will lead to a neutral, and therefore futureproof, way of pension accrual. The defined contribution will be leading, instead of the pension result. Therefore, the current defined benefit scheme (In The Netherlands around 70% of the employees participate in a DB scheme) will disappear.

The defined contribution will, regardless of the age of the employee, be a flat percentage of the pensionable income. The fact that a younger person has a longer period for return on investment than an older person causes a decreasing accruel over the years.

There will be two kinds of pension contracts. The first one is based on the investment of the pension capital till the moment of retirement, and at the retirement date the accrued capital will be transferred into lifelong pension payments. Thus, an individual builds up his own capital until he retires, after which his capital will be transferred into the collective distribution poule, out of which he will receive his payments. The second contract is based on the system of direct transfer of the premium into pension rights, based on the current interest rate. The financial position of the pension fund will determine whether these pension rights can be increased in the future by indexation or should be decreased. All participants share the financial risks in both the build-up phase and the distribution phase.

The execution of these new contracts can be done by the current providers. The obligation for some companies (about 70%) to participate in an industry-wide pension fund will remain in place.

Implications PensionAgreement

What is the impact of the PensionAgreement for the employers? That depends on whether the employer is participating in a (mandatory) industry-wide pension fund, has a company pension fund, or has a contract with a commercial pension provider. In the first two cases it is up to the social partners to decide how include the pension scheme in the labor conditions. The employer will be in control when he has a contract with an insurance company, a Premium Pension Institute (PPI) or a General Pension Fund (APF.

An industry-wide pension fund is legally obligated to calculate and charge his premium in a so called average way. This means that the premium percentage for all employees, regardless their age, is the same just like the PensionAgreement prescribes. No real changes are expected for the employer. For employees the impact will be huge. Based on the solidarity behind the average premium, young employees pay part of the pension accrual for older employees. In the new system every employee has his own pension capital or right. Up until now the young employee has overpaid in premia and will want to be compensated for this fact when the system is changed. Who will have to pay for this compensation is unclear but it seems unreasonable to have the employer pay the bill.

An employer who has his own pension contract with a commercial provider will face enormous consequences of the PensionAgreement. Changing the labor agreement for the pension section can only be done if all employees approve to the changes. It seems fair to expect that the employees will only agree if they are compensated for a possible loss. Changing a defined benefit scheme into the new pension contract demands a lot of thinking. Same goes for changing an increasing premium scale into a flat premium rate. Big discussions will arise about compensating the older employees for the downsizing of their premium. And in this case the bill will have to be paid by the employer.


At this moment all involved parties are constantly talking, internally and with each other, to agree on the final version of the PensionAgreement. It is expected that these negotiations will continue till the summer of 2020. The legislator strives to complete the legislative process by the end of 2021 or the beginning of 2022. The intention is to have the new pension contract implemented in 2024. A long transitional period will be needed to make all the necessary legal arrangements and fix the administrative challenges.

Does this mean that the employer can sit back until 2024 and see what will happen?

Employers participating in a pension fund have to wait and see what the social partners agree on. Employers who have their own pension contract with an insurance company, PPI or APF don’t have this luxury. They have to start thinking how they will revise the pension scheme in the future, what the financial consequences are for the company and for the employees, and in what way the needed approval from the employees will be obtained. In the case that the current agreement with the pension provider expires in the near future, it will be wise to implement the PensionAgreement into the new contracts already.

For more information or if you have any questions, please do not hesitate to contact our pension advisor Paul van Ravenzwaaij,