Effective 1 January 2018, the standard pension target age for tax purposes (the pensionable age in the pension scheme) will rise from 67 to 68 years. The reason for this is the rising life expectancy. As 1 January 2018 nears, we have produced a summary (below) of the most important changes.

Consequences for the pension scheme

To the extent that an employee continues to work until the age of 68, the rise in the pension target age will result in a longer period of pension accrual. Working for one additional year will automatically mean a reduction of benefit duration by one year.

In many cases, the rise will lead to reduced pension accrual, and, in most cases, it will result in a reduced premium burden to the employer. This is due to the fact that the maximum percentages on graduated premium scales will decrease. For career-average schemes, maximum accrual percentages will remain the same, but premium costs can be expected to decrease, because benefit duration will also decrease.

Employees can of course opt for their pension benefit to commence before they reach the age of 68, but their pension will then be actuarially recalculated, with a reduced benefit as a result.

Adjustments necessary?

With pension schemes that do not provide for maximum pension accrual for tax purposes and, as a result, still contain ‘tax space,’ the rise in the pension target age do not necessarily need not lead to a change. As long as the current pension scheme remains within the fiscal framework as per 1 January 2018, no adjustment will be required.

However, if the pension scheme does provide for maximum pension accrual for tax purposes, it will need to be changed in order to be within the fiscal framework as per 1 January 2018. Which means that either the accrual percentage must be lowered or the pensionable age increased. In case of a defined contribution scheme, both changes might be necessary.

Taking no action may lead to adverse tax consequences as the costs of such schemes will not be tax-deductible, meaning extra costs for both the employer and employee.

To raise the pension target age or, as the case may be, to reduce the pension accrual percentage, approval from the employees and/or the works council will be required. Where changes to the pensions agreement are involved, the works council has the right of consent. Should the works council refuse its consent, the employer may not proceed with the change without alternative permission from the subdistrict court.

As the employer will benefit in cost terms, whilst their employees will be left in a less favourable position with regard to terms of employment, the question arises whether compensation is appropriate. Employees can probably be expected to demand the premium release by way of compensation for the decreased value of their pensions.

Although there is no statutory compensation obligation, the employer can nevertheless offer compensation as a way of smoothing the way for approval of the desired change.

Compensation can take several different forms: for example, via a salary rise, so that employees themselves can set funds aside for their pension. The employer can also propose a change in the division of the pension premium, such that they contribute more as compared to what their employees contribute. Besides, the employer can ‘upgrade’ other elements of the pension scheme, e.g. by decreasing the threshold, increase the pensionable salary or improve the indexation promise. And although employees might not immediately embrace this enthusiastically and might not really feel this as compensation, the employer can also give them the opportunity to continue working longer, so that their pension accrual can as yet increase.