Employer Action Code: Act
As a step toward its objective of finalizing major legislative reforms affecting employer pension plans (see June 2020 Global News Brief: Sweeping pension reforms — further details released), the government has released 250 pages of draft legislation for public consultation. The draft provisions are in line with the reforms outlined by the government earlier in 2020, which generally would require pension accruals going forward to be on some type of defined contribution (DC) basis (collective or individual) with a flat contribution rate unrelated to age. Following the end of the consultation period on February 12, 2021, the government aims to submit formal draft legislation before the summer with a January 1, 2022 effective date. All pension arrangements would be required to transition to a new contract type between the effective date and January 1, 2026.
Separately, certain changes agreed as part of the planned pension reforms have been split out for accelerated final legislative approval, which is expected in January 2021. These include early retirement changes expected to be effective January 1, 2021, and an option for partial lump sums expected to be effective January 1, 2022.
Key details
Notable new details in the draft legislation include:
- Existing pure DC plans would be allowed to continue with their present contribution design (i.e., increasing age-based contribution rates, rather than the required flat-rate design under a new pension contract type) for current members, but subject to maximum legislated rates. Existing insured defined benefit (DB) plans would be permitted to retain age-based contributions for the past service of current members but would have to move to a DC basis for future accruals; the DC future contribution rates may be age-related for current members (subject to the same legislated maximums). All plans, whether or not they retain age-based contributions for current members, would have to provide flat-rate contributions for new joiners after the transition.
- The requirement to have a transition plan in place by 2024 for the move to a new pension contract type would apply to insured plans (DB or DC) as well as pension funds.
- The default for pension funds (essentially all of which are DB or collective DC plans) would be to transfer past service benefits to a new pension contract type. Not transferring would have to be formally justified by the pension fund trustees and social partners (i.e., labor unions and employers’ associations). A transfer has to be reviewed by the pension supervisor as part of the supervisor’s approval of the overall implementation plan. Individual member consent to the transfer would not be required, but there would be a collective right of objection, and associations of pensioners and deferred members would have a right to be heard.
- Pension funds that intend to transfer past service benefits to a new pension contract type would not be required to reduce benefits during 2022 – 2026 if their prior year-end funding level is at least 90% and their target funding ratio (minimum 95%) is expected to be reached before their transition to the new contract. In the current solvency regime, benefit reductions are required if the funding ratio is below about 104% (plan-specific basis) over multiple year-ends. Thresholds for pension indexation would also be eased before transition (e.g., full indexation would be allowed at funding ratios of 105% and higher, instead of the current only partial indexation permitted at the 110% threshold).
- Pension funds would have to survey their membership’s risk preferences at least every five years and reflect the results in the fund’s investment risk attitude (defined by member cohort) and goals.
- Required compensation from employers to members whose future pension accruals are negatively affected by the changes could be delivered by means other than through higher pension accruals (e.g., lump sum payment, salary increase). Compensation via pension accrual, which must be completed by 2036, would also be required for affected new employees. Conceptually, this should help sustain labor market flexibility, as affected older workers would therefore not be giving up this compensation when changing jobs.
- The tax-favored cap on total annual contributions to a member’s pension account, excluding risk premiums and administrative charges, would be 30% of pensionable earnings. The cap is derived based on the targeting of a retirement income replacement ratio of 75% of average pay after 40 years (reflecting various assumptions) and would generally be subject to change every five years, though for stability purposes the draft legislation calls for holding it fixed through 2035 (unless the derived rate moves by at least five percentage points in either direction).
Separately, certain changes agreed as part of the planned pension reforms have been split out for accelerated final legislative approval and implementation:
- From 2021 through 2025, employees could agree with their employer to leave their job up to three years before the social security normal retirement age (NRA) and receive an employer-paid benefit of up to 21,200 euros per year during the interim, without the employer being subject to the RVU (Regeling Vervroegde Uittreding/Early Retirement Plan) levy. Under current rules, employers that provide a termination plan are subject to a government levy of 52% of the benefit paid if that plan is considered an RVU. As such an agreement could be set up through 2025 and last for up to three years, this measure could have an impact until the end of 2028. Employees would not be required to commence their employer retirement benefits during the bridging period.
- From January 1, 2022, all members of an employer-provided retirement plan would have the option to take up to 10% of the old age pension value as a lump sum at retirement or at the February following their social security NRA. Currently, benefits may only be paid as an annuity (although individuals may choose to have a higher pension in the first number of years and a lower pension thereafter).
- Employees would be allowed to carry forward up to 100 weeks (500 days) of unused additional (i.e., beyond statutory minimum) vacation days, as well as paid time off in lieu of overtime, on a tax-deferred basis, effective January 1, 2021. The current maximum is 50 weeks (250 days). Saved leave can be used during the employee’s career for sabbaticals or prior to retirement. (In principle, these days can only be carried forward for a period of five years from the calendar year when they were earned, but employees can simply extend this period by written statement to the employer.)
- Social security NRA will increase to age 67 in 2024 (2021 under current rules) and subsequently rise by eight months (rather than one year) for each year of increased life expectancy from age 65. (Law was approved in December 2020.)
Employer implications
The draft provisions and timing are consistent with previous government communications, underscoring the importance for employers to complete their planning for how they will navigate the complex decisions and processes involved in transitioning to the new pension arrangements. While consultations on the main legislation may be ongoing, as noted previously, certain provisions are expected to come into force shortly or within the next 12 months.
