Q&A: occupational pension schemes in Netherlands

Occupational pension schemes

What are the main types of private pensions and retirement plans that are provided to a broad base of employees?

The main types are defined benefit plans and defined contribution plans. Both types provide for annual benefits only, which implies that lump-sum payments are, in principle, not possible. Defined benefit plans generally provide for indexation upon the condition that the pension provider is funded sufficiently. In defined contribution plans, the accumulated pension capital is generally converted into fixed annual retirement benefits upon reaching retirement age.

Defined benefit plans have flat-rate pension contributions, whereas defined contribution plans have age-related pension contributions. As at March 2022, approximately 80 per cent of all employees participate in a defined benefit plan and approximately 20 per cent of all employees participate in a defined contribution plan. However, all employers, when setting up a new pension plan, opt for a defined contribution plan.

In addition, there is draft legislation pending that would prohibit the accumulation of pension capital through a defined benefit plan. This draft legislation implies that defined contribution plans will become the standard pension type in the Netherlands.

Are employers required to arrange or contribute to supplementary pension schemes for employees? What restrictions or prohibitions limit an employer’s ability to exclude certain employees from participation in broad-based retirement plans?

Approximately 80 per cent of all employees participate in a mandatory industry-wide pension plan. The Act Mandatory Participation in an Industry-wide Pension Fund provides for such mandatory participation. If an employer is active in a certain industry (eg, the construction industry or the education sector), this employer is obliged to ensure the participation of all its employees in the pension plan of the applicable industry-wide pension fund. If an industry-wide pension fund is not applicable and an employer opts to set up a supplementary pension plan for its employees, these plans generally apply to all employees. This is not related to any legislation, but to the fact that pension providers negotiate that all employees must be covered by the applicable pension plan.

Can plans require employees to work for a specified period to participate in the plan or become vested in benefits they have accrued?

The Pensions Act provides for a vesting period of two months only.

What are the considerations regarding employees working permanently and temporarily overseas? Are they eligible to join or remain in a plan regulated in your jurisdiction?

Employees who are seconded overseas can continue to participate in a Dutch pension plan. This is more difficult for employees who start to work in an overseas legal entity. However, despite applicable European pension directives, overseas tax legislation generally does not provide for tax-favourable continued participation in a Dutch pension plan. To tackle this, the Wage Tax Act provides for participation in a Dutch pension plan with retroactive effect once an employee returns to the Netherlands.

Do employers and employees share in the financing of the benefits and are the benefits funded in a trust or other secure vehicle?

There are virtually no legal restrictions on the employer part of the pension contributions or on the employee part of the pension contributions. However, the average employer part of the pension contributions is two-thirds of the total pension contributions and the average employee part of the pension contributions is one-third of the total pension contributions. The total pension contributions are, on average, equal to 25 per cent of the pensionable base. According to the Pensions Act, benefits must be funded and administered by a pension provider who is independent of the employer. There are three types of pension providers: pension funds, insurance companies and premium pension institutions, which are all legal entities.

What rules apply to the level at which benefits are funded and what is the process for an employer to determine how much to fund a defined benefit pension plan annually?

Employers must pay pension contributions to a pension provider to fund the benefits. The amount of pension contributions payable is calculated by the pension provider on an annual basis. According to the Pensions Act, the minimum funding ratio is 105 per cent of the accumulated pension capital. In the case of underfunding, in principle, the pension provider is obliged to increase the pension contributions, but the involvement of labour unions generally prevents significant fluctuations in pension contributions on a year-to-year basis.

What are customary levels of benefits provided to employees participating in private plans?

In the case of a retirement age of 68 and 40 years of service, the Wage Tax Act provides for a maximum amount of annual retirement benefits that equals 75 per cent of the average pensionable base. The average pensionable base equals the average pensionable salary minus a state pension component of approximately €15,000. The pensionable salary is capped at approximately €115,000 per year. In practice, annual retirement benefits are within the range of 50 to 75 per cent of the average pensionable base.

Are there statutory provisions for the increase of pensions in payment and the revaluation of deferred pensions?

In the Netherlands, pension escalation is generally referred to as indexation of pensions. According to the Pensions Act, all pension plans must include a clause regarding indexation. Pension providers are furthermore obliged to mention whether accumulated pension capital is adjusted to inflation and whether this indexation is conditional or unconditional.

What pre-retirement death benefits are customarily provided to employees’ beneficiaries and are there any mandatory rules with respect to death benefits?

Almost all pension plans contain a spousal bereavement pension in cases of pre-retirement death and death after retirement. Some pre-retirement spousal bereavement pensions are limited to current employees and therefore do not apply to former employees. The standard level of annual benefits of the spousal bereavement pension equals 70 per cent of the retirement benefits.

When can employees retire and receive their full plan benefits? How does early retirement affect benefit calculations?

According to the Wage Tax Act, an individual is entitled to retirement benefits equal to 75 per cent of the pensionable base only when the standard retirement age of a pension plan is 68 years. This does not mean that employees cannot retire at an earlier age and receive benefits, but annual retirement benefits will be reduced. The rule of thumb is that, for each year an individual retires before the age of 68, the annual retirement benefits will be reduced by 7 per cent.

Are plans permitted to allow distributions or loans of all or some of the plan benefits to members that are still employed?

The Pensions Act does not allow such distributions or loans. If distributions or loans occur despite this restriction, substantial fines and fiscal consequences will be triggered.

Is the sufficiency of retirement benefits affected greatly if employees change employer while they are accruing benefits?

No. Pensions are always vested and employees are entitled to transfer their accumulated pension capital to the pension provider of their new employer.

In what circumstances may members transfer their benefits to another pension scheme?

According to the Pensions Act, employees are entitled to transfer their accumulated pension capital to the pension provider of their new employer upon their change of employment. In addition, employees generally have the right to transfer the accumulated pension capital of a defined contribution scheme to another pension provider upon reaching retirement age.

Who is responsible for the investment of plan funds and the sufficiency of investment returns?

The pension provider who administers the pension plans and the corresponding assets is responsible for the investment of plan funds and the sufficiency of investment returns. Pension providers are legal entities that can employ asset managers or make use of the services of third parties to manage their assets.

Can plan benefits be enhanced for certain groups of employees in connection with a voluntary or involuntary reduction in workforce programme?

Not directly. Employees can decrease their retirement age, but they cannot be forced to do so and a decrease in the retirement age decreases the annual retirement benefits. However, the Wage Tax Act supports tax-favourable retirement plans – which are not the same as pensions or administered by pension providers – to a certain extent.

Are non-broad-based (eg, executive-only) plans permitted and what types of benefits do they typically provide?

Executive-only plans are allowed but rare in the Netherlands. This is mainly related to legislation on equal rights, which makes it very difficult to only offer a pension plan to a certain group of employees within a legal entity. However, various employers offer pension plans if and insofar as employees earn more than the maximum pensionable salary of €115,000 per year.

How do the legal requirements for non-broad-based plans differ from the requirements that apply to broad-based plans?

The pension plans that are offered if and insofar as employees earn more than the maximum pensionable salary of €115,000 per year are defined contribution plans, which are not tax favourable.

How do retirement benefits provided to employees in a trade union differ from those provided to non-unionised employees?

Approximately 80 per cent of all employees participate in a mandatory industry-wide pension plan. The Act on Mandatory Participation in an Industry-wide Pension Fund provides for mandatory participation if representatives of employers and representatives of employees ask the government to approve such mandatory participation. This means that, in practice, unionised employees participate in a pension plan of an industry-wide pension fund and non-unionised employees do not. Pension plans of industry-wide pension funds are almost always defined benefit plans, whereas employers who set up a pension plan themselves (because there is no such applicable mandatory participation) opt for a defined contribution plan.

How do the legal requirements for trade-union-sponsored arrangements differ from the requirements that apply to other broad-based arrangements?

There is no separate legislation for unionised arrangements.