Future of Pensions Act 💸

Future of Pensions Act

On 1 July 2023, the Future of Pensions Act came into force. The reasons for revising the pension system include changing social preferences and financial circumstances. This includes the growing number of flexible employment relationships and self-employed workers, and the decrease in the number of people with permanent employment. The new law changes the types of pension agreements and includes new schemes for self-employed workers.

Types of Pension Agreements

In the old pension system, there were three types of pension agreements: the benefit agreement, the capital agreement, and the premium agreement. In the new system, only the premium agreement remains. In a premium agreement, a fixed pension premium is determined for the employee's pension accrual. This is typically a fixed percentage of the annual salary or the pensionable salary. The final pension amount depends on factors such as the paid pension premiums, investment returns, interest rates, and life expectancy developments. In short, there are three types of premium agreements:

• Solidarity Premium Agreement: In this premium scheme, there are no individual pots for investments by pension providers. The available premium is invested collectively. Investment returns are distributed according to age, with younger participants receiving more returns and taking on more risk than older participants.
• Flexible Premium Agreement: This premium scheme offers more flexibility for the participant to align the pension contract with personal preferences. The participant has an individual pot and can choose to take more or less risk.
• Premium Benefit Agreement: This premium scheme is a pure premium scheme up to 15 years before the statutory retirement age. From 15 years before the statutory retirement age, the participant can purchase a fixed lifelong pension from the retirement date. This form will only be accessible to insurers, as they can guarantee a nominal pension.

What Changes for the Employer?

It is important to know whether the employer is affiliated with an industry pension fund. If the employer is affiliated with an industry pension fund, the pension scheme will be amended at the fund level. This employer is obliged to comply with the amended pension agreement, and employee consent is not required.

An employer who has agreed on a pension scheme with the employee on an individual level can amend this in two ways. The first way to amend the pension agreement is with the employee’s consent, making the employee bound to the amended pension agreement. The second way is unilateral amendment, which is only possible if the employer has agreed on a unilateral amendment clause with the employee. To invoke the unilateral amendment clause, the employer must have a sufficiently important interest. A change in pension legislation is considered such an interest, giving the employer a reason to invoke the unilateral amendment clause.

Additionally, the employer must also obtain the approval of the works council when amending an individual pension scheme, or seek advice from the employee representative body or the employee meeting. If agreements are made at the collective level, such as in a collective labour agreement, employee input is arranged through collective consultation between employer and employee organisations.

Self-Employed Workers

Only a limited number of self-employed individuals take advantage of saving for their retirement. To prevent a significant drop in income, the Pension Agreement includes arrangements aimed at the self-employed.

The new law gives self-employed individuals more opportunities to arrange their pensions in a tax-efficient manner. Additionally, an experiment in the second pillar has been set up. A self-employed individual can join the industry pension fund relevant to the sector in which they work. They also have the option to join a pension scheme offered by a general pension fund, insurer, or premium pension institution, which is open for voluntary participation by the self-employed. Self-employed individuals can specify a flexible pension choice salary, within a certain minimum and maximum, based on which the pension premium is calculated.

Conclusion

Employers should check whether they need to take action to apply the new legislation to their employees. The transition period runs until 1 January 2028. If you have questions about your (potential) affiliation with an industry pension fund, please contact Dennis Oud, Hans de Haij, Tessa Sipkema, or Elke Hofman.