Relevant aspects of the transition to the new pension system
As mentioned, employers must make a decision before October 1, 2026 regarding the transition to a new pension scheme that complies with the requirements of the FPA. Under certain conditions, the current defined contribution pension scheme with an age-dependent premium tier can be continued on the basis of transitional law.
This exercise should not be underestimated, as a number of aspects must be assessed before the employer can carefully make a decision. These aspects relate to both the history of the employer's company pension scheme and the future ambitions of the company pension scheme. These aspects be summarized as follows.
History
- Has the employer's pension scheme ever changed, such as from a defined benefit scheme to a defined contribution scheme, and what exactly happened in the amendment process (i.e. consent, works council, expectation communications)?
- Pose those past changes any liability risks (for the future)?
Future
- What is the pension ambition of the employer in the new pension scheme and what liability risks arise from the transition to a new scheme?
- May transitional law be applied, and if not, to what extent should employees be compensated if the new flat rate premium scheme leads to a decrease in pension accrual for a certain group of employees?
These are questions that are becoming more and more relevant in (legal) practice, while pensions aspects of employment contracts are more than ever in the picture among employees, works councils and (other) employee representatives.
Historical amendment processes: from defined benefit schemes to defined contribution schemes
First, historical amendment processes are often characterized by the fact that guarantee (defined benefit) schemes were abandoned by introducing a defined contribution scheme in which all risks regarding pensions were transferred to the employees. At the time, defined contribution schemes were to get rid of the expensive defined benefit schemes.
However, the consequences of the communication in the context of these amendment processes are underestimated. When obtaining the consent of the works council and the employees to change to the defined contribution schemes, it is often expressed to the employees that it is expected that this change will have little or no negative impact on pension outcome. It has often been stated that the new scheme makes it possible to achieve a pension result that is (somewhat) comparable to the original promised pension in the defined benefit scheme.
And although defined contribution schemes are characterized by the fact that all risks are borne by the employee, the aforementioned communication can lead to a certain ‘best-efforts obligation’ on the part of employers.
What does this best-efforts obligation’ entail? It means, for example, that in the transition to the new defined contribution scheme, the employer must actually ensure a realistic chance that a (somewhat) comparable result can be achieved in this scheme. If it can be objectively established that this is not feasible in the new scheme, for example because the age-dependent premium is not sufficient in the majority of scenarios, this can lead to liability.
Why is this important for the transition under the FPA? This is important for the transition under the FPA because the company's own pension scheme will be scrutinized by employees, the works council or (other) employee representatives. They will take another good look at the current scheme and whether the expectations expressed (in the past) are being met.
In many cases, we see that the assessment of whether the current pension scheme could objectively meet the stated expectations at the time of the amendment sets the starting point for the new pension scheme.
Decision making going forward: opting for transitional law or the new defined contribution scheme?
The choice of applying transitional law is not without risk
In addition to looking backward to potential historical liabilities of the company pension scheme, decision-making going forward is also an important aspect.
Is it possible to simply continue with the employer’s company pension scheme with age-related premiums? It certainly does not seem that way, as the Dutch legislator has clearly stated that the employer must prove that there is no unjustified age discrimination in such cases. If an employer cannot do so, then opting for transitional law is void, which means that the decision to use the transitional law has no legal force whatsoever. We understand this is an unpopular message, but it is one made by the legislature.
It cannot be emphasized enough that the FPA made the amendment of pension schemes or the use of transitional law to the full responsibility of employers who currently execute their own company pension scheme.
The legislative history of the FPA indicates that employers must be able to objectively justify the choice to maintain the current defined contribution scheme with age-dependent premiums. After all, that choice leads to possible indirect age discrimination in pay between employees in the old and new scheme in accordance with the Equal Treatment on the Basis of Age in Employment Act (ETAE Act):
"In a scheme with progressive premiums, there is a distinction based on age. After all, a younger participant in this situation receives less premium than an older employee. This form of age discrimination must be justified in existing progressive-contribution plans by the use of graduated scales that target the same pension accrual for all age cohorts. Employers who choose to honor the progressive contribution for their existing employees should keep in mind that they must be able to justify the age distinction under Article 7, paragraph 1 (c) of the ETEA Act."
Thus, the choice to opt for transitional law requires the assessment of whether there is a legitimate purpose to do so. The burden of proof rests explicitly with the employer. In this regard it is relevant that the legislator intended the transitional law to prevent disadvantages for current employees and employers. Whether this is the case will have to be assessed by the employer and substantiated with calculations.
The bottom line is that it will have to be assessed whether the transition to the new scheme, including the associated compensation scheme, can also fully prevent the disadvantage of that transition. Only if that method is less appropriate is it 'necessary' to maintain the current defined contribution scheme (i.e. to opt for transitional law).
From the above, it is evident that the employment law-related assessment of whether compensation should be offered in the transition to the new pension system is also important. We note that in that context, it is highly unlikely that a reasonable weighing of interests in the context of a unilateral change clause or a reasonable proposal to terminate the current defined contribution scheme (if there is no unilateral change clause) would result in a decision to waive (full) compensation.
In the article published in Tijdschrift voor Arbeidsrecht in Context on October 3, 2024, Robin van der Ham discusses this topic in detail. See: R.F. van der Ham, "Employers' right of choice to maintain existing age-dependent defined contribution plans is not absolute," TAC 2024, no. 3, pp. 132 - 140 (Dutch only).
Another point of attention: the pension ambition in the new pension scheme
Another point of attention concerns the choice to transition to the new flat-rate defined contribution scheme. With that, a look at the past is relevant for determining the premium percentage and the intended pension result in the new scheme. As mentioned, in many cases the expectations communication in the past regarding the intended pension outcome in the company pension scheme will determine the starting point for the new pension scheme. The contribution rate and pension ambition will have to be based on this, unless the employer intends to change the pension ambition with the transition to the new defined contribution scheme.
In case the employer intends to change the pension ambition with the transition to the new defined contribution scheme, we enter the doctrine of (unilaterally) changing the employment condition: pension. The employment law framework that applies here is incorporated in the Dutch Pensions Act in Article 19.
Final words
Given the above, we urge employers to handle the transition carefully, whether the choice is to retain their own company pension scheme (i.e. opting for transitional law) or to transition to the new flat rate defined contribution scheme.
We are of course happy to assist in case of any questions. Please contact the team members below.
