Pension reforms: Where do they lead to?

There is obviously no “one right way” to reform pensions. This article highlights three very different approaches in Europe with different focuses and drivers for the respective pension reforms.

Belgium shows that even a simple thing such as equal treatments among em-ployees is not very easy to implement and would lead to a lot of work for employers. In the United Kingdom, just after the auto-enrolment to ensure people to be on a pension plan, the government is now giving the choice to use the retirement savings in the form of a capital lump sum or annuities. The Netherlands seems to go another way and take away the tax advantages to reduce government finance burden. At the same time they also increase the retirement age so pensioners will hopefully not be too far off with their savings on retirement. 

Belgium

New legislation in effect from January 1, 2014, has introduced harmonized rules on equal treatment for blue- and white-collar employees regarding dismissal and compensa-tion. In light of this, the government is now also taking steps to promote equal treatment for all employees in occupational pension plans.

From January 1, 2015, to January 1, 2025, all corporate and sector occupational pension plans must be amended to gradually eliminate differential treat-ment of blue-collar and white-collar employees. During this “standstill” period, existing differential treatment may not be increased, nor any new distinctions introduced. From January 1, 2025, differential treat-ment between blue-collar and white-collar employees in occupational pension plans will be prohibited.

Any differential treatment prior to the end of 2014 of blue- and white-collar employees in occupational pension plans will not be treated as discrimination.

As from 2015, employers are required to initiate the process of harmonizing the company-level occupational pension plans, which must be completed and implemented by January 1, 2025. This, for companies with large number of blue-collar workers, will require substantial groundwork, careful evaluation and planning with insurers and pension funds managing their occupational pension arrangements. 

United Kindom 

Compared with the pension auto-enrolment system started just less than two years ago, the recent reform plans seem to be showing a different attitude from the government. It gives members of defi ned contribution schemes total freedom over how they withdraw their pension savings as either lump sum or annuities.

From April 2015, everyone in a defi ned contribution scheme will be able to access their entire pension savings from age 55. The pension commencement lump sum (25%) will remain tax free, and any income taken after this can be as additional lumps sums or as annuities as the individual decides. It will be taxed at the saver's marginal rate. As the change will be fully retrospective, anyone currently in drawdown can benefi t from the change.

To avoid a major tax bill when withdrawing the entire pension pot at once, members may take out annual lump sums. This could involve staying invested in the stock market and going into “income drawdown”. From April 2015, there will be no cap on the amount of money that can be withdrawn from this arrangement, enabling income to be staggered in order to manage tax liabilities.

For those who want a guaranteed income for life, they will still be able to purchase an annuity, but now with greater freedom since restrictions have been removed on accessing small pots, and costs and caps on income drawdown should drop.

The government has also promised to ensure that the 13 million members involved receive free and impartial advice on how to get the most out of their pensions, with GBP 20 million provided over two years to consumer groups and the industry to develop advisory services.

This change puts the full responsibility in the pen-sioners’ hands to decide how they want to receive their pension savings. Concerns are also raised that this reform may lead to longer-term costs if pensioners decide to draw down taxable income early in their retirement, but potentially end up dependent on the state later. Employers will want to ensure that their pensioners are fully informed and educated about the choices now available to them 

The Netherlands

A new law that passed in the Netherlands on May 27, 2014, will bring substantial changes to pensions in 2015. Known as Witteveen 2015, this will affect employers and employees alike. We list here three major changes for illustration. 

Accrual rates 

The annual accrual percentages used for corporate pension plans will be decreased in 2015. This applies to fi nal pay plans, average salary plans, and defined contribution plans. This will result in a reduction in savings allowed by employees, and lower pension premiums.

As premiums are generally paid by both employers and employees, it will be up to employers to decide how to manage the premium decrease. One option would be to reduce employee contributions; another would be to use the released salary costs for other pur-poses. This will require careful consideration, and any changes to pension arrangements administered by an insurer may well require prior works council consent. 

New Financial Assessment Framework for Pension Funds (FTK)

The FTK is part of the Pensions Act which lays down the legal fi nancial requirements for pension funds. New rules on pension funds are also expected for January 1, 2015, with the intention of making supplementary pensions more transparent and better able to withstand fi nancial shocks.

Among other things, the new FTK stipulates that funds must clearly communicate the fi nancial risks and the consequences for the purchasing power of the pension. Participants are entitled to a realistic picture, also in relation to whether the pension is fully indexed or not.

In addition to the above mentioned, as retirement age will be further raised from 67 to 68 years as of January 1, 2016, five years earlier than originally planned, it is expected to lead to new pension reductions.

What is behind all these? Lower tax-deductible pension contributions will save the national Treasury significant amounts, but since people are working longer, the pension savings rate could be slowed down without affecting their pension savings on retirement. This will hopefully reduce the pressure of government fi nance and thus making the pension system more sustainable in the long run.

The new rules mean that almost all pension plans will need to change on January 1, 2015, and it is therefore imperative that companies start planning how to deal with the new rules as soon as possible.