The raising of the age of entitlement to a pension under the General Old Age Pension Act (Algemene Ouderdomswet, "AOW") is a subject that has often been in the news during the past months. Employers and employees have been unable to reach agreement, and so the cabinet has taken the decision: the state pension age will be raised from 65 to 67. On 16 October 2009, the Minister of Social Affairs and Employment, Piet Hein Donner, informed the lower chamber of the Dutch Parliament about the cabinet's plans in this regard. The exact contents of the proposed bill will only be made public after the Council of State (Raad van State) has given its advice, but the main outlines have already been announced. It is therefore a good time to examine what the employment-law and tax consequences of the above change will be.
Main outlines of proposed bill
The state pension age ("AOW age") will be raised to 66 years in 2020 and to 67 years in 2025. Individuals who, as at 1 January 2010, have reached or passed the age of 55 will receive an AOW pension at the currently applicable age of 65. For those who are at least 50 years old but below 55 on 1 January 2010, the AOW age will be 66, while those below 50 will only receive their AOW pension when they are 67.
Under the plans as announced thus far, special rules will apply to employees working in "strenuous occupations" (zware beroepen). However, it is not clearly indicated what constitutes a strenuous occupation. The AOW age for employees in such occupations will be as set out above, but an employee may not be required to work in a strenuous occupation for more than 30 years. Where an employee has worked in such an occupation for 30 years, the employer will therefore be required to give the employee a lighter job (if necessary, after retraining him/her). Over the coming years, employers and trade unions will have to decide which occupations should be designated as strenuous ones.
Employees who, upon reaching the age of 65, have worked at least 3 days a week for 42 years will have the right to opt to stop working. In such a case, they will be entitled to a lower AOW pension.
Another important issue is the employability of older employees, which employers will be required to promote. The measures to be taken by employers in this regard include the implementation of a "sustainable employability policy", important elements of which are good working conditions and a good career development policy. To this end, amendments will be made to, among other things, the Occupational Health and Safety Act (Arbowet).
AOW and supplementary pensions
The Dutch pension system consists of three pillars:
- Government-run schemes, the main one being the AOW scheme;
- Occupational pension schemes for employees;
- Personal pension arrangements made by the relevant individual. These most commonly take the form of an annuity (lijfrenteverzekering).
The principle is that, between these three sources, each individual should have a sufficient pension. In the case of retired employees, a sufficient pension is one that amounts to 70% of the last-earned gross salary based on full-time employment.
In principle, the raising of the AOW age need not lead to the raising of the pensionable age under an occupational pension scheme, as there is no direct link between the AOW and such schemes. However, in the recently unveiled plans Minister Donner has stated that the cabinet will implement tax measures that are geared towards a pensionable age of 67.
Changes to tax relief for pension contributions
The cabinet's point of departure is that the tax rules should make it possible for an individual to have built up the same amount of pension from occupational schemes and/or personal arrangements by the time he/she reaches the age of 67 as can be built up by the age of 65 (i.e. the current AOW age) under the current tax rules. In other words, the target pension age for tax purposes will be set at the AOW age (67). As there will be two extra years in which pension rights can be built up, the maximum annual accrual percentage (opbouwpercentage) in respect of which tax relief is granted will be lowered. Consequently, almost all occupational pension schemes in the Netherlands will have to be adjusted in line with the new tax rules. If this is not done, the result will be the accrual of excessive pension rights. In such a case, the employer will be required to withhold income tax on the surplus in accordance with the applicable rates.
Unilateral amendment of employment conditions
Increasing the pensionable age to 67 will in many cases entail changes to the employment conditions applicable to an employee. This is because, generally, the employer and the employee will have agreed that the latter will retire and start receiving his/her pension at the age of 65.
Many employers are under the impression that a statutory amendment automatically leads to the amendment of the relevant employment conditions. This is not the case: pre-existing employment conditions cannot simply be overridden by a statutory amendment. If an employee does not agree to a change to the employment conditions, the question is whether the employer is entitled to impose such a change unilaterally. In most cases, the test applied by the court in this regard is whether the employer's interest in the change is so compelling as to outweigh, applying the standards of reasonableness and fairness, the employee's interest. In practice, this test is difficult to meet.
Where there has been a statutory amendment, the party seeking a change to the relevant employment conditions can also invoke Article 6:248(2) of the Dutch Civil Code, which provides that a rule imposed pursuant to an employment contract will be inapplicable to the extent that, applying the standards of reasonableness and fairness, it would be unacceptable for that rule to be applicable. The onus is therefore on the party seeking the change to convince the court that the continued applicability of the conditions unchanged would be unacceptable. Again, this test cannot easily be met.
For a more detailed elaboration of the legal situation regarding unilateral changes to employment conditions, please see the article on this subject in our newsletter of June 2009.
Pension-triggered termination of employment contract
In many cases, an employment contract for an indefinite period will provide that the contract will terminate automatically on the last day of the month in which the employee turns 65. Under the Equal Employment Opportunities (Age Discrimination) Act (Wet gelijke behandeling op grond van leeftijd bij de arbeid, "WGBL"), age discrimination in employment is prohibited except where a distinction based on age is objectively justified. The 65-year threshold in the above type of contractual clause is considered to be objectively justified because 65 is the current AOW age. Consequently, the raising of the AOW age will necessitate raising the age at which an employee's contract can be terminated as described above. Where necessary, employment contracts will therefore have to be amended accordingly.
For more information on the current situation regarding pension-triggered termination clauses, please see the article on this subject in our newsletter of October 2009.
Although the exact content of the proposed new statutory rules on the raising of the AOW age is not yet known, it is already clear that employers will have to take action on several fronts in connection with the legislative changes. It will in any event be necessary to adjust occupational pension schemes in line with the new tax rules. In addition, the age at which an employee's contract terminates due to his/her having reached pensionable age will have to be shifted to 67. It should be noted that disputes may arise over the amendment of employees' employment conditions in connection with the raising of the pensionable age. Lastly, the implementation of a sustainable employability policy will require a great deal of effort on the part of employers.