After the financial crisis hit hard in the autumn of 2008 following the bankruptcy of Lehman Brothers, and stock exchanges worldwide collapsed, it soon became clear that there would be no indexation of pension benefits (to compensate for inflation) at the end of that year. For most pension schemes that are administered by pension funds, indexation depends on the available assets, of which around 40% usually consist of shares. The value of assets has since dropped significantly below the required minimum level of 105%. By 1 April of this year, the pension funds in question had to submit recovery plans to the Dutch Central Bank (the DNB) indicating how, within the next five years, they expect to bring their funding ratio back up to the required level of 105%. At a funding ratio of 100%, a pension fund's capital is exactly sufficient to cover all accrued pension benefits. What impact will the financial crisis now have on pension costs?
The answer to this question depends on the legal relationship between the pension fund and the employer: under the Pension Act, this relationship is determined by the administration agreement.
If, due to the employer's line of business, participation in an industry-wide pension fund is mandatory, the contents of the administration agreement are unilaterally determined by the board of the relevant pension fund, and individual employers do not have any direct influence on this. In order to raise the funding ratio, the fund's board – on which employers' organisations and trade unions each have an equal number of representatives – can decide: (i) not to grant indexation to the benefits payable to pensioners, (ii) to increase the contribution (whether flat-rate or otherwise) payable by employers and employees and/or (iii) to decrease the pension benefits thus far accrued. The boards of the industry-wide pension funds that decided not to grant indexation at the end of 2008 are now expected to increase the contributions payable, but to wait as long as possible before decreasing the accrued pension benefits.
If an employer has entered into an administration agreement with a company pension fund, the amount of the contributions payable is determined under that agreement. Under the Pension Act, pension funds must set the contributions at a level that will cover the relevant costs. If there is a drop in the value of the assets of a pension fund that is not matched by a corresponding drop in the pension liabilities, the contribution must be increased. Whether the employer can be requested by its company pension fund to pay a lump sum amount to immediately raise the funding ratio to 105% depends on the agreement between them. Where a fixed premium has been agreed, as in the case of employers such as AKZO Nobel, the employer can rely on the agreement and is therefore not liable to pay higher contributions. Its employees will not have to pay a higher contribution, but they will ultimately receive a lower pension.
Some pension schemes are administered not by a pension fund, but by an insurance company. During the term of the relevant administration agreement, an insurance company may not increase the agreed premiums in order to cover accrued pension benefits. However, the insurance company will have invested the pension contributions received and, like other investors, incurred losses. Employers will therefore have to take into account that, when negotiating the extension of administration agreements, insurance companies will probably demand higher premiums.