Urgent changes to pension schemes required by 1 January 2018 changes to the legal retirement age

With effect from 1 January 2018, the legal retirement age for collective pension schemes (second pillar pension) will increase from 67 to 68. The increase of the legal retirement age is  likely to result in pension schemes exceeding the maximum pension accrual causing the immediate taxation of the total pension rights, as a lump sum. Employers will therefore urgently need to amend their pension schemes before 1 January 2018 to avoid this outcome. 

Who is affected by the changes? 

There are various forms of collective pension schemes.  Most common are the defined benefit  (“DB”) and defined contribution (“DC”) schemes. 

In a DB scheme, the amount of pension depends on the number of years worked in combination with the average salary of an employee. The outcome of the pension is more or less predictable and the risk of the return on investment is born by the employer. The other, more unpredictable, option is a DC scheme.in which the amount of pension a person receives depends on the contributions paid during the contribution period and the return on investment achieved with those contributions.

In either case, DB or DC, the pension accrual must remain within statutory limits, on the basis of the retirement age. With a DB scheme the pension is accrued at a rate of a maximum of 1.875% of the average salary for each year's service (2017). As a result of the proposed legislation employers will either have to increase the retirement age in their pension scheme to 68 or reduce the pension accrual rate, in order to remain within the tax-qualified limits. DC pension schemes will also have to take into account adjusted annual pension contributions after the new legislation becomes applicable.

Consultation required with both employees and Works Councils 

Relatively new legislation is applicable in the Netherlands which gives works councils greater say on changes to company pension schemes. The consent of the works council would be required if a pension agreement is created, withdrawn or changed.  In addition, to the consent of the works council, employees will also have to (individually) approve the amendment of the pension scheme.

What action is required and by when?

Employers should already have in hand the need to amend their DB and DC pension schemes as a result of the changes to the legal retirement age before 2018.  Any employers who have not done so already must act immediately. Failure to make the necessary amendments before 2018 will trigger the immediate taxation of the total value of the accrued pension rights as a lump sum.  The pension will not only be subject to tax at the progressive tax rate (max. 52%), an additional 20% (sanction) tax will be due.  

For further information or to discuss any of the issues raised, please contact Jelmer Post, jelmer.post@loyensloeff.com