Pension: Autumn storms for employers

Many employers will soon have to take some difficult decisions. Their pension scheme has to be amended, as do perhaps the other terms and conditions of employment. And this has to be done in close agreement with both employees and the pension provider. This time-consuming process must be undertaken carefully and must have led to concrete results by 1 January 2014.

Introduction: Raising of the State Pension Age and Standard Pension Retirement Age Act [Wet verhoging AOW- en pensioenrichtleeftijd (Wet VAP)]

Unless their applicable industry branches arrange this matter themselves, employers should quickly take a close look at their pension scheme. The new tax laws arising from the Wet VAP will trim the pension schemes as of 1 January next year. The maximum annual accrual of benefits will be more limited and the retirement age shall (in principle) have to be 67. Employers can decide, however, how to meet the new requirements. One of the most important issues is what the new (collective) retirement age is going to be. Will it straight away be 67, or will 65 remain the norm for the time being (until 2015)? And should a new retirement age also apply to the benefits accrued prior to 2014 or will they continue to become effective at 65? In addition, the flexibility options at the individual level can be reviewed. May an individual employee decide to retire earlier or later? Will temporary variations in the level of retirement benefits (high/low construction) or part-time retirement be made possible? Employers need to seriously consider the consequences of the various options. Which option, for example, best meets its policy with regard to older employees?

Role of the pension provider

Employers cannot decide on the above-mentioned issues without reaching some agreement with the other parties involved, certainly with the pension provider, which is often an insurer or a pension fund. The pension provider has to offer and implement the pension scheme. In view thereof, insurers have an understandable preference for their own standard product. In practice, pension providers usually make a proposal for a new pension scheme and allow deviations but only at an extra cost. Unless negotiations are possible, there is therefore limited room for the employer’s own wishes.

Role of the Works Council [Ondernemingsraad] and employees

It is highly inadvisable to indiscriminately adopt a pension provider’s initial proposal, not only because of all of the above details that have to be considered, but especially because of the required agreement with a company’s employees and its Works Council. If the pension scheme is administered by an insurer, then, under section 27 of the Works Councils Act [Wet op de Ondernemingsraden (WOR)], the Works Council must agree with every proposed change to the pension scheme. Moreover, implementing a new pension scheme means infringing on previous agreements with employees concerning their pension (‘the pension agreement’). In principle, any changes will require the individual agreement of each employee. This requirement is not affected by the fact that a change to the pension scheme has been caused by new tax laws or by the Works Council having already agreed to any changes. In general, getting employees to agree will not simply be a routine matter. Employees will want to see something in return for the deterioration of their terms and conditions of employment. Consequently, employers must decide what they are going to do with the "savings" on pension benefits that they will make by implementing the more austere regulations. Will they give their employers something else in return, such as compensation in the form of a lower personal contribution to the pension scheme or a higher salary? In principle, there are all sorts of levels and possibilities with regard to trimming pensions and offering compensation.

Unilateral change?

The final outcome will not always be to everyone’s satisfaction. An employer can implement a unilateral change to its pension scheme if, for example, such a change is motivated by a compelling interest. In such case, however, the employer’s interest in making the change will have to be weighed against the employees’ interests, which will be harmed by the change. All sorts of additional circumstances could play a role here, and the wish to comply with the new tax laws will presumably not suffice in itself. The Works Council’s viewpoint will usually be of major importance. In addition, the compensation offered and the number of individual employees that approved of the changes, will also be taken into account.. Other important reasons for the changes proposed may also play a role. And, finally, the procedures followed will also be relevant. Both the Works Council and the individual employees should be informed carefully and in a timely manner at every phase of the procedure.

Work ahead

The options available to an individual employer for making changes are strongly determined by the specific provisions of its terms and conditions of employment. These provisions sometimes give an employer more power to make changes and, in other cases, less. For example, to rely on a compelling interest, a so-called ‘unilateral changes clause’ is required. In short, employers will have to give considerable attention to their pension scheme in the next few months. They should first examine their possibilities for making (unilateral) changes. They should then consider all of the relevant wishes, possibilities and consequences, and discuss and agree on and implement them in a timely manner. All of these steps should be taken with due care. Finally, employers might benefit from giving immediate consideration to further legislative changes that have been announced. New proposals based on the Coalition Agreement [Regeerakkoord] and the Social Agreement [Sociaal Akkoord] include further amendments that will become effective as of 1 January 2015.