The new pension system
Society is changing. We're all getting older on average, and people no longer stay with the same employer all their working lives. It is important that our pension system changes with our changing needs.
Why do we need a new pension system?
The present pension system has a number of vulnerabilities, Pension funds make promises about the amount of pension benefits they intend to pay out to the fund's members. However, if the returns on their investments are lower than expected, pension funds cannot live up to their promises. More importantly, the promises that a pension fund has made to individual groups of members are backed by the collective reserves it holds for all of its members. This could lead to discussions about which part of these reserves are paid out to which groups, especially now that pension funds have insufficient reserves to pay out all benefits now and in the future. Moreover, people no longer stay with the same employer all their working lives, while the current pension system still presumes they do. Employees who leave the pension fund halfway through their career to start their own business, for example, build up insufficient pension compared to the contributions they have paid. In other words, the current pension system no longer matches the changing labour market.
Our pension system needs to change in order to fix these vulnerabilities. That is why the government and the social partners (employers’ associations and trade unions) have concluded a Pension Accord. De Nederlandse Bank was an independent consultant in this process.
What will remain the same in the new pension system?
The new pension system will of course keep the good elements of the present system. For example, we will continue to save up for a lifetime pension and we will continue to share the risks of old age, death and occupational disability collectively. Pension schemes will also continue to be administered collectively, and pension providers will continue to apply a collective investment policy to limit the costs for their members. Compulsory employment-related pension build-up will also stay, which means many people will be part of the system.
What will be different in the new pension system?
- The new pension system will be contribution-based, and pension funds will no longer make promises about the amount of benefits they intend to pay out in the future. The pension fund invests the pension scheme contributions and records the personal part of the collective pension assets for each of its members. That way, everyone has an overview of the share of the assets reserved for their pension. As a result, the new system gives much less cause for discussion about uncertain promises and about the distribution of these collective assets.
- Under the new scheme, each member’s pension contribution is allocated to their individual pension capital. This will prevent people from building up too much or too little pension in relation to the contributions paid. It will also make the system more compatible with the changed labour market. Since pension contributions apply the same percentage for all ages, pension costs under the new scheme are more stable and will not increase as workers age.
- In the new scheme, pension providers can take the differences between groups of members more into account when investing contributions. For example, younger groups are still far away from retirement and are able to pay contributions for years to come. This means a pension fund can take higher risks on their behalf. Older groups have fewer opportunities to recover from lower returns and therefore need more security. Therefore, a pension fund will take less risk on their behalf.
- This approach makes pensions more personal. In the new system, employers and employees can also decide to set apart a specific share of the collective pension capital as a buffer for setbacks. The rules for this buffer must be laid down in advance. That way, everyone can see how it is built up, for example by setting apart a share of the pension contributions or by using a share of the investment returns. And it is also clear when money from the collective part is moved to the personal pension assets.
In addition, the government and social partners have agreed on the statutory retirement age, early retirement, options for pensions and survivors’ pensions.
When will the new pension system enter into effect?
Now that there is an accord, the Cabinet is preparing a legislative proposal to amend the Pensions Act. If the House of Representatives and the Senate approve it, the new Pension Act will enter into force. The new pension rules are expected to come into force no later than on 1 January 2023. Before 1 January 2027 at the latest, employers, employees and pension providers must have brought their pension schemes with pension build-up in line with the new system. Between 2023 and 2027, the social partners and pension providers can make agreements about the new pension schemes and about the transition from the current to the new system. This transition is a complicated process. The government and the social partners have set the deadline at 1 January 2027 to allow the social partners and pension providers sufficient time to complete this process with due care.
What is DNB's role in the new pension system?
We provide advice to the government and the social partners on the new pension system. As the supervisory authority of pension providers, we will monitor the transition process to the new system to ensure that it happens fairly and with due care. Tjerk Kroes, Director of our Economic Policy & Research Division, sat on the steering committee which worked out the Pension Accord on behalf of the cabinet and the social partners.