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Coalition Collapse – What’s Happened to the Dutch Pension Agreement

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AEGON's ADfis consultant Erik Schouten discusses what the coalition collapse means for the Dutch pension system.

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Coalition Collapse – What’s Happened to the Dutch Pension Agreement

  1. 1. COALITION COLLAPSE – WHAT’S HAPPENED TO THE DUTCH PENSION AGREEMENT? Erik Schouten, Consultant AEGON Adfis, Legal and Tax Consultancy Group In mid-April 2012, the Dutch minority coalition government collapsed as a result of failed budget negotiations. Following the collapse, the two coalition parties, the liberal VVD and Christian Democrats (CDA), promptly reached agreement on new budget cuts and reforms (the ‘Spring Agreement’) with three smaller opposition parties. The new agreement has a major impact on pensions and it is not clear to what extent this new agreement replaces or negates the pension agreement of 2010. What is happening with pensions in the Netherlands and how will companies be affected? 1 A new budget for 2013 With the Dutch economy in recession, the government is facing a large budget deficit next year unless further spending cuts are made. Unless a deal could be reached to meet the European Commissions 30 April deadline for measures to reduce the budget deficit to no more than 3% of GDP, it was feared that the Netherlands AAA credit rating status could be in jeopardy and that the Netherlands could face a European fine of more than one billion euro. For seven weeks, therefore, the Dutch coalition tried to agree billions of euro in cuts for the 2013 budget. However, the coalition parties were reliant upon the support of the anti-immigration Freedom Party (PVV). On 21 April, the PVV refused to back the proposed budget and the cabinet collapsed. The two coalition partners are now running a caretaker administration with elections to be held on 12 September. Fortunately, following the collapse of the cabinet, three smaller opposition parties (D66, Green Left and Christian Union) rapidly stepped into the breach and helped agree a new budget that would sufficiently reduce the budget deficit. The Spring Agreement and Dutch pension reform The Spring Agreement contains some major changes to Dutch pensions which in part pre-empt and replace measures agreed in the pension agreement of 2010. The new measures are: • For state pensions (AOW), the retirement age will increase more quickly than previously agreed. The first step will be taken in 2013 when the retirement age will increase by one month. In1 As of 25 May 2012. For other articles on the situation in the Netherlands, please see alsohttp://www.aegonglobalpensions.com/en/Home/Publications/News-archive/News/Reforming-Dutch-pensions---new-capital-requirements-for-existing-pension-rights-/ and http://www.aegonglobalpensions.com/Documents/aegon-global-pensions-com/Publications/Newsletter-archive/2011-Q4/Pension%20reform%20in%20The%20Netherlands%20%E2%80%93%20the%20move%20to%20defined%20ambition%20pensions.pdf?epslanguage=en 1 May 2012
  2. 2. subsequent years, the retirement age will increase further and in larger steps. In 2019, the retirement age of 66 will be reached, and, in 2023, the age of retirement for state pensions will be 67. In 2024, the retirement age will be linked to life expectancy for the first time. • For occupational pensions, the retirement age will increase to 67 in 2014. This measure is not different from the current proposal of law, although in addition, fiscal support during the pension accumulation period will now be limited further.Incompatible agreements – what is the status of the 2011 pension agreement?In June 2010, the Dutch social partners signed a pension agreement (Pensioenakkoord), which wasfurther detailed in a memorandum in June 2011. In 2011, the parties agreed to increase theretirement age for both occupational and state pensions from 65 to 66 in 2020 to be reassessedevery five years to see if further increases are required. The state pension would be guaranteed torise in line with wage inflation until 2028 and would also increase by 0.6% annually from 2013. Inaddition, the state pension age would be made more flexible, with pension benefits being reducedfor early retirees and increased for later retirees. The pension agreement also will have aconsiderable impact on the present system in that pension contributions (which are mostly paid byemployers) will –in principle – be capped at present levels and will not rise any further.The new Spring Agreement directly contradicts the pension agreement by raising the retirement ageof the state pension much more quickly than previously agreed and by cancelling the annualincrease of the state pension by 0.6%. As a result, the largest labour union (FNV) has stated that it isnow reconsidering its support for the 2010 pension agreement. In addition, the proposal of lawrequired to change the retirement age for occupational pensions to 67 as of 1 January 2014, whichwas already accepted by the House of Representatives and was awaiting discussion in the Senate,has been put on hold.What does this mean for employers?At first glance, the impact of the Spring Agreement on employers would seem to be limited. Theincrease in retirement age for occupational pensions in principle remains unchanged. Second pillaror occupational pensions are the exclusive domain of the social partners in the Netherlands. In itself,therefore, raising the state retirement age does not automatically have any effect on the retirementage for occupational pension plans. However, although reducing the maximum level of taxadvantages for occupational pensions does not automatically lead to negotiations betweenemployers and employees to adjust existing pension arrangements, it is likely that such negotiationswill now be demanded.As it now stands, employers with defined benefit plans in the Netherlands look as if they will gainfrom the new changes, as the maximum amount of tax advantaged contributions will be reduced by18% for career average plans and 19% for final salary plans. However, when tax law is changed insuch a way that individuals will only receive the same pension rights as currently promised at theage of 65 if they work two years longer, it is likely that employees will look to their employers toshare some of the pain. Looking to the future, with the largest union openly reconsidering its supportfor the pension agreement, it is also now far from clear what will happen to the proposal to introducedefined ambition pensions in the Netherlands. 2 May 2012
  3. 3. What happens now?As of mid-May, the five parties have agreed on the details of the Spring Agreement, which have nowbeen sent to the Netherlands Bureau for Economic Policy Analysis (CPB) which will assess theimpact of the reforms on the government’s finances. The results of the CPB assessment areexpected mid-June.And what about the pension agreement?The Spring Agreement has thrown the status of the pension agreement into doubt. The socialpartners negotiated for a long time in order to reach agreement and the translation of that agreementinto legislation was a considerable achievement. Even though the Dutch government still needs toprovide answers to a number of crucial questions regarding the pension agreement, the reaction ofthe largest labour union to the new changes indicates that the future of the Dutch pensionagreement is once again uncertain.AEGON and deriskingAEGON Global Pensions offers a broad range derisking capabilities (including buyouts and buy-ins, liability driven investments and longevity swaps) in the Netherlands, UK and the USA. If you area multinational company with pension funds in one or more countries, AEGON Global Pensions canhelp you decide on the most efficient derisking route, taking into account the cultural, legislative andaccounting aspects of your local pension schemes.To find out more about our derisking capabilities, please contact AEGON Global Pensions.Tel: +31 (0)70 344 8931 | aegonglobalpensions@aegon.com | www.aegonglobalpensions.com 3 May 2012

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