The Dutch pension system is built on a three pillar system
1. State Benefit
The State Benefit is paid out to all citizens in the Netherlands. The total amount received depends on the number of years lived in the Netherlands and whether the person is single or living together with a partner. As per January 2013 the retirement age for the state pension (AOW) has increased and will continue to be increased in future years. In addition, the age threshold for all other social benefits has increased to the same level as the new AOW age.
The threshold has changed from 65 to 65 years and six montht effective from 01-01-2016. The threshold will increase gradually until reaching the age of 67 in 2021. All social benefits (unemployment benefits, disability benefits etc.) will stay in line with these incremental changes to the AOW retirement date. There are two different kind of pension schemes: defined Benefit and Defined Contribution
2. Employer schemes
With a DB scheme, the employer promises a specified annual benefit on retirement age. This can be done based on average pay or based on a replacement rate of the final salary. The annual accrual is insured with a pension insurer. The insurance company is liable for the Investment risks, longevity risks and return on investment risks. In the Netherlands a DB scheme needs to be fully funded.
Under IAS and FAS accountancy rules, a defined benefit scheme can have impact on the annual account.
With a DC scheme, the employer promises the employee an annual premium. With this premium the employee builds up an pension capital. With this capital the employee needs to buy an lifelong old age pension (annuity), possible in combination with a partners pension. The employee is liable for the Investment risks, longevity risks and return on investment risks.
Legal structure pension agreements between employer and employee.
The legal structure of an pension agreement between the employer and employee is important to understand. The base of the agreement is the pension agreement. This is the commitment you make to your employee about the pension scheme. This is a legal binding agreement and is part of the employment contract. As an employer you agree on the outlines of the pension plan.
Based on the Dutch Pension Act (“Pensioenwet”), you have to insure the pension agreement with a pension provider.
- Pension agreement (“pensioenovereenkomst” in Dutch): The pension agreement contains the pension arrangements between employer and employee as part of compensation and benefits. This document records the agreement between the employer and employee.
- Administration agreement (“uitvoeringsovereenkomst” in Dutch): the agreement between the employer and the insurance company/pension administrator. The employer is obligated to insure his pension arrangement. The conditions between the employer and insurance company are recorded in this document.
- Pension regulations (“pensioenreglement”): this document describes the pension scheme from the insurance company to the employee summarizes the pension agreement and the administration agreement to the employee.
When the employer wants to change the pension plan, the pension agreement between employer and employee primarily has to be changed. The works council has to approve this change. It depends on the pension agreement whether or not individually approval is also required.
A change of pension plan normally also requires a new administration agreement and new pension regulations. Both documents have to be agreed upon between the employer and pension provider (and thus pension board).