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Pension-related issues have featured strongly in the 2005 collective bargaining round in the Netherlands, as they did in 2004. Employers are cutting the costs of early retirement schemes and at a number of companies pension risk is being shifted towards the employees. Meanwhile, the financial position of occupational pension funds has improved significantly, while the government has announced its intention to introduce a new Pension Act.
Pension-related issues have continue to have a strong impact on the 2005 collective bargaining round in the Netherlands. While this was also the case in 2004 (NL0409104F), the nature of the problem has changed somewhat.
Bargaining over numerous new sector-wide collective agreements has sought to include provisions directed at dealing with the consequences of the government’s recent decision to scrap the tax incentives linked to early retirement and to introduce 'life-cycle leave' arrangements (NL0411102F). This appears to be a problematic operation, leading to several cases of unfinished negotiations, though a number of company-level agreements have been concluded. Below we examine the most noteworthy recent developments surrounding early retirement and changes in a number of company collective agreements, along with the financial position of occupational pension funds and the government’s proposed new Pension Act.
Partial shift of pension risks in company agreements
Akzo Nobel (chemicals) has reached agreement with trade unions to switch completely to a defined-contribution occupational pension scheme for its 12,000-strong workforce. Negotiations with the unions on this issue took almost two years. As a consequence of this agreement, the group will no longer run any pension risks from 2006 onwards. In exchange for this, the company will deposit EUR 150 million more in the coffers of the pension fund. Additionally, Akzo will issue the pension fund a loan of EUR 100 million. Akzo will be contributing over the next five-year period a pension contribution of 20% of the pensionable wage (the wage less old-age pension). In 2006, Akzo’s employees will be paying 4% of the same pensionable wage (currently 5%). The contributions will be deposited into a fund for price indexation of pensions for the workforce. Indexation for pensioners depends on the financial position of the pension funds.
This move was prompted by Akzo’s desire to dispense with responsibility for uncertain burdens arising as a result of the defined-benefit pension schemes negotiated to date. This desire has been amplified as a consequence of the recent introduction of International Financial Reporting Standards (IFRS), obliging companies to offer more insight into their financial risks, including potential pension obligations.
Similar schemes have since been introduced at SNS Reaalgroep (banking/insurance), Philips (electronics), VendexKBB (retail trade) and DSM (chemicals). At the same time, it appears from a survey carried out by Towers Perrin among 134 listed European companies that most financial managers at listed Dutch companies expect firms to continue to share responsibility for the risks run by their company pension funds.
The trade unions have for some time been opposed to the introduction of defined-contribution schemes. While they are still less than enthusiastic about the changes, they see no alternative that can prevent them. In the words of a Christian Trade Union Federation (Christelijk Nationaal Vakverbond, CNV) official, Jelle Loosman: 'The old situation provided more certainty for employees. But something has to change if companies wish to retain their credit assessment and continue to invest. It is in our interests to find ways to cooperate.'
The change of position adopted by the unions does not necessarily mean that all the problems have vanished. On 1 July 2005, trade unions accused Getronics (computing) of breaking its word. According to the unions, at the time it took over PinkRoccade, Getronics said that the pension schemes of PinkRoccade’s employees would remain unchanged. Getronics however, has announced its intention to replace the existing defined-benefit scheme with a defined-contribution scheme, within the scope of harmonising the group’s employment conditions. On 7 July, Getronics announced that it was considering involving the unions in establishing a transitional arrangement.
Economising on pension schemes
The costs to employers of a large number of early retirement schemes are gradually being reduced. Some schemes are also being individualised to a high degree. At Akzo Nobel, employees under 52 years old have access to complete individual freedom of choice with respect to saving for early retirement. In so doing, Akzo makes use of the new life-cycle leave arrangement (NL0411102F). Employees aged 52 and older may stop working at the age of 62 and receive 80% of their last-earned wage.
In the construction sector, the new life-cycle leave arrangement is also to be used for early retirement. From now on, a retirement age of 62 applies to the sector, two years later than previously. Employees wishing to retire earlier must save in order to make this possible. The retirement age has also been increased in the graphic media sector (from 62 to 63 years old).
Choices of retirement age have also been introduced in the healthcare sector and at Rabobank. In both cases, pension benefits increase in line with how long employees continue working.
Most civil servants will also have to work longer in the future before retiring. On 5 July 2005, employers and trade unions reached agreement on this issue for the approximately 1 million Dutch government workers. The life-cycle leave arrangement is also being used for early retirement within government. In order to stop work at an average age of 62 years and three months, 0.8% of the annual salary is set aside.
The proposed cut-backs in early retirement have been met with fierce opposition and industrial action at both the fire brigade and ambulance service. The employees are demanding that the current retirement age of 55 be maintained. Employers would like to scrap this scheme. The most important reason is that the government will be scrapping tax incentives associated with early retirement schemes.
Pension fund position improves gradually
As a result of the shaky financial position of a large number of pension funds, most pension contributions have gone up significantly. This has resulted in a 3% increase in labour costs for each year of employment, despite extremely moderate wage increases (only 0.7% on an annual basis in the first quarter of 2005). For employees, the combination of increased pension contributions (as well as medical expense contributions) and moderate wage trends has resulted in decreased earnings in real terms.
The expectations are that the increase in pension contributions will either bottom out or come to an end in 2006. The reason is that the Dutch pension funds are managing to replenish the financial shortfall faster than expected. This came to the fore in the annual review published by the supervisory body for pension funds, banks and insurance companies published at the end of May 2005. While at the start of 2003, as many as 380 pension funds found themselves saddled with a shortfall in terms of future obligations, this number amounted to only 185 by the end of 2004. The scale of the shortfalls has decreased as well: at the start of 2003, some 190 funds had coverage of less than 100%. At the end of 2004, this figure had come down to a mere eight. The improved financial position can also be largely attributed to the high contributions and cutbacks made with respect to existing early retirement schemes.
Proposal for a new Pension Act
Since 2002, there have been plans to replace the existing Pension and Savings Fund Act (Pensioen en Spaarfondsenwet, PSW) with a new Pension Act. The legislative proposal will now be put before parliament in the second half of 2005. The most important parts of the Act are already clear at this point:
- employees and employers will be given more security about occupational pension benefits. To this end, requirements will be set with respect to the shareholders’ equity of the pension funds, for example. The Minister of Social Affairs and Employment, Aart Jan de Geus, has reached agreement with the social partners and the Dutch Central Bank that a pension fund participant may only be confronted with a situation where the reserves of the pension fund are (temporarily) lower than the requisite minimum once in the space of 40 years;
- the requirements for information and transparency will be tightened concerning accrued rights and the adjustment of pensions in line with inflation (indexation). Should a lack of clarity arise surrounding indexation policy, full indexation can be assumed as the premise; and
- the government would like all employees aged 18 and older to participate in an occupational pension scheme. The intention is at least to halve the present number of employees excluded from participation (this proportion amounts to 9% of all employees at the moment).
It remains to be seen if the scheduled introduction date for the new Act of 1 January 2006 will be met. One of the consequences of the delay is that the pension funds need not change the calculation methods used to determine solvency for the time being. In contrast to the terms of the future Act, in calculating the funds' degree of cover at present, the market rate of interest is not taken as the point of departure. Instead, a fixed rate of interest of 4% is taken for calculation. Given the currently low interest rates, assuming the market rate would force the funds to increase their reserves, which would - once again - result in having to increase the already significantly raised contribution levels.
Commentary
The pension issue has within a relatively short space of time become one of the thorniest topics in Dutch labour relations. Occupational pension schemes are at the heart of numerous collective agreement negotiations, varying from the schemes’ set-up and contributions levels to the retirement age.
It is clear that a great number of schemes have been economised on in recent months and years, and this trend seems set to persist. In this respect, the retirement age has shifted gradually towards 63.
The second trend is of a more fundamental nature: in an increasing number of cases, the pension risks are shifting from employer to employee. In this respect, it is noteworthy that this appears to be the case only with company-level pension funds for the time being. Insofar as the shift is linked to introducing or increasing the range of choices available to individual employees, this development touches the very core of the pension system, which was originally based on solidarity. (Robbert van het Kaar, HSI)