On March 30, 2022 the Dutch government submitted draft legislation to reform the Dutch pension system, (the Bill) which is expected to come into effect on January 1, 2023. If the Dutch House of Representatives approves the proposal, it will go to the Senate where it is expected to pass. The deadline for transitioning to the new scheme is January 1, 2027 at the latest. This change will impact every employer with a pension scheme in place. In practice, once this new law is in effect, all pension arrangements with employees and contracts with pension providers will need to be renewed. In this alert we provide you with an overview of the most important reforms to the Dutch pension system and recommended steps forward. For those not yet familiar with the current Dutch pension system, we begin with a brief explanation.

Dutch pension system
The current Dutch pension system consists of three pillars that together determine the pension amount a person will receive after retirement:

• • State pension (in Dutch, AOW) – a pension benefit paid to people upon reaching the current retirement age of 67 and funded by contributions paid by younger people; also known as a “pay-as-you-go” system;
  • Supplementary collective pension – occupational pension, arranged through employment;
  • Private individual pension products – arranged by individuals on their own.

The collective pension schemes under the second pillar are arrangements between employers and employees and are commonly administered by pension funds. These are generally funds for a specific industry – most of these have been made mandatory, company or for a group of people working in a specific sector Alternatively, insurance companies may administer the pension scheme. These schemes are funded by capital funding – the pensions are financed by contributions paid in the past as well as the investment return on those contributions.

At present, the Dutch Pension Act allows for three types of pension schemes: (1) a defined benefit scheme (either a final pay scheme or a career average scheme), (2) a defined capital scheme, or (3) a defined contribution scheme. The defined benefit schemes are being phased out of the Dutch pension system, and defined capital schemes are already quite rare. Defined contribution schemes (either in full, or combined with characteristics of other schemes) are becoming more common for employees, but the current generation of retirees mostly still have defined benefit schemes.

Purpose of the reform

The Dutch government wishes to reinvigorate the pension system since, among other reasons, low interest rates and the aging Dutch population are putting pressure on the system, resulting in higher costs and a reduction in pension benefits. The increase in self-employment and other forms of flexible labor are also having an impact on the Dutch pension market, as fewer people now participate in pension plans.

The purpose of the new system is to provide for the accrual of a pension as part of an individual pension capital, combined with the benefits of collective risk-sharing. Defined benefits are no longer possible. The Dutch government intends to abolish the system of average premiums whereby one premium is paid for each individual, regardless of age. It wants to introduce a premium tailored to the individual circumstances and allocated to the individual pension capital, which is probably the most essential element of the new pension system.

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