Pension innovations

A new pension agreement was recently adopted. It included several separate agreements on such items as: increasing the retirement age, reorganizing the pension system and sustainable employment. Not all of these agreements have their final form, some of them require revision after which the changes will be enshrined at the legislative level.

What does this mean for mere mortals?

1. Raising the retirement age will be slower than planned.

It was originally planned to raise the retirement age for three years by 4 months a year in order to raise it to 2021 years by 67. Under the new agreement, the state retirement age will remain 2020 years and 2021 months in 66 and 4, but from 2022 it will still be will increase, and by 2024 it will still reach 67 years.

Until now, raising the retirement age has been closely associated with increasing life expectancy. And if it increased by a year, then the retirement age also increased by a year. Now this increase in the retirement age will be only 8 months with an increase in average life expectancy by a year. This amendment is likely to be passed by the Senate in early July 2019.

This slowdown in the increase in the retirement age means that many workers in these years will reach retirement age earlier than expected. At the same time, many employment contracts automatically end when an employee reaches retirement age. If there is such a clause (on the termination of the employment contract upon reaching the retirement age established by the state) in the contract, but continuation of cooperation is desirable, the employer must promptly take care of concluding a fixed-term contract. If the contract does not provide for any reservations regarding the retirement age, then the employer can terminate the contract at any time, both before and after the employee reaches retirement age.

Well, in order to avoid discussions about equal working conditions, it is better to have the same rules in all cases. This means that the termination of the employment contract upon reaching the retirement age will apply to all employees (unless it is agreed separately and the employee's work must continue).

2. LIV benefits (location-inkomensvoordeel) for employers will be reduced by 2020

The slowdown in raising the retirement age will also affect the budget (spending will be more than previously planned). Therefore, to offset these costs, it was decided to reduce the allowance for (young) low-wage workers (LIV). In 2020, the benefit will be halved, and by 2024 it will be canceled altogether. The high rate of the LIV benefit will also be halved compared to the previous (2018) year. These changes will take effect next year.

For employers who have workers receiving LIVs, this means payroll costs will increase from next year.

3. Change in the pension system by 2022

Also, the new pension agreement includes a clause on the abolition of the average pension system. Pension funds currently levy so-called average contributions. The average pension contribution is an equal percentage of the contribution for each employee, regardless of gender, age, or health status. And for their contributions, employees then receive the same pension accrual. This question is very controversial. After all, young employees pay pension contributions much longer than those who began to do so at an older age. As a result, they receive too little pensions.

However, this system has worked for a long time, but as a result of an aging population and a changing labor market, young people are increasingly in a disadvantageous position than older people.

4. Age-independent pension contributions

With the abolition of the averaged pension system, a system of age-independent contributions will be introduced. This means that for all pension schemes there will be a maximum annual contribution amount (as a percentage of wages), with which the employee creates his own pension.

In such a transition, employees aged 40 and over will be at the most disadvantageous position, since they can receive a significantly lower pension. Such a change to the system is acceptable only if these employees are compensated. Therefore, a special group was created, which will deal with the further development of updates to the pension system.

The introduction of an age-independent contribution system will apply to all pension schemes. And since most retirement plans do not have an age-independent premium, this means that all of these retirement plans will have to be changed. And these changes will take a lot of work. Employers who are not tied to mandatory pension funds will have to make the changes themselves.

While the new pension system still needs to be refined, employers who do not belong to mandatory pension funds have already tested how beneficial it would be for them to switch to a system with an equal percentage of pension contributions for each employee.

The change in the system is intended to prevent high compensation costs associated with aging and an increase in the working population. Alternatively, it is possible to create such a scheme only for new employees, and for those already working, leave everything as it is, that is, make this transition gradual.

5. Threshold exemption from RVU fine in 2021

When an elderly employee is dismissed shortly before official retirement, the employer must pay him a certain amount of compensation to compensate for the lack of income before receiving a pension from the state. Until now, this has cost the state dearly, since if such dismissals qualified as an early retirement unit (RVU), the employer had to pay an additional so-called pseudo-final fee in the amount of 52% of the compensation amount.

The new pension agreement provides for a threshold exemption from this payment (penalty) for the period from 2021 to 2025. This threshold exemption means that the employer does not have to pay if:

• early retirement occurs within the last three years before reaching the state retirement age;
• there is an agreement on voluntary dismissal for both the employer and the employee;
• the gross reimbursement amount does not exceed a threshold amount to be determined later (approximately EUR 19 per year).

This rule can be used regardless of whether the employee works in harmful work or not. If the compensation paid by the employer exceeds the threshold amount, the RVU penalty will only need to be paid for that excess. The rule will also work if early retirement occurs earlier than three years before reaching the state retirement age.

This temporary measure will mainly facilitate early retirement for low-wage workers. If the employee receives a higher salary, the reimbursement is likely to exceed the exempt amount, and the employer will still have to pay an RVU fine, albeit slightly reduced. However, an employer is not required by law to offer an early retirement scheme to all of its employees. In addition, the employer cannot oblige his employees to retire ahead of time.

6. The number of tax-free vacation weeks that can be accumulated will double

According to current legislation, it is financially allowed to accumulate 50 weeks of vacation without paying tax. By applying this limit, the tax authority prevents the occurrence of too long deferral in the payment of taxes. If the employee saved more than 50 weeks of vacation, the employer must pay payroll tax on this excess.

In order to give employees the opportunity to retire earlier, the new pension agreement increased this limit of accumulated vacation weeks from 50 to 100. The employer can create additional vacation, for example, by paying for (partly) overtime or shift work with an additional increase in vacation. However, an employer cannot simply promise older workers a few weeks of additional vacation time. The latter will remain an early retirement scheme and an RVU penalty may be applied. When this will happen is not yet clear, but it is expected that this will happen only after the renewal of the pension system is worked out in more detail.

Dutch writer: Cornelien Donner-Brursma, Senior Consultant and Pension Lawyer at KWPS, email: broersma@kwps.nl, www.kwps.nl

Taken from https://www.salarisnet.nl/2019/07/dit-merkt-u-in-2020-van-het-nieuwe-pensioen/