NETHERLANDS - The social partners have agreed on a flexible retirement age for second-pillar pensions and the state pension AOW by linking them to life expectancy.

The representative organisations of employers and employees said the retirement age should be raised to 66 in 2020 and that a decision on further rises should be made every five years.

The social partners said the agreement was a structural solution to the retirement age, linking capital-funded second-pillar pensions and the pay-as-you-go AOW to life expectancy.

Employers and employees have also agreed to stabilise pension costs by adjusting the pension contracts to the effects of increased longevity and market developments, the social partners said.

The government, now collapsed, had proposed a rise of the retirement age to 67 in 2025 after earlier negotiations between the social partners broke down.

Under the agreed terms, workers are still allowed to retire at 65, but will receive 6.5% lower benefits, while working longer will entitle them to a 6.5% higher benefit for every additional year.

However, workers who are over 55 at the moment should still be able to retire at 65 for the full AOW benefit, the social partners added.

By linking the AOW to the salary index, the state pension will become inflation-proof, the social partners said, adding that this would benefit less-educated workers and the self-employed.

Employers and employees agreed pension schemes should have factored in increasing longevity at the start of 2011.

To better cushion financial developments, combined with stable contributions, pension arrangements should be modernised by 2012, the social partners argued.

They also agreed all participants would share the costs if pension funds suffered a shortfall.

The new agreement avoids the issue of exempting workers in hard jobs from a raised retirement age, as the government had proposed.

"Employers and employees can now make arrangements within sectors of the industry or companies about workers who have been active for a long time," the social partners said, adding that they needed to reach further agreement on increasing the perspectives of older workers on the labour market.

The agreement between the social partners is likely to become part of negotiations for a new government coalition after the elections on Wednesday.

The pension funds' lobbying organisations VB and OPF said they were keen to help draw up further details on the development of contributions, increased longevity, governance and the robustness of second-pillar pensions.

However, they said a "realistic time scale" was necessary for designing a "solidly financed and feasible new pension contract" that could also be properly explained to participants.

Piet Hein Donner, the outgoing social affairs minister, said: "The pension bargain is a good start.

"In principle, this is a proper basis for increasing labour participation of older workers, as well as keeping up the robustness of our old-age facilities."

The union CNV said it would ask its members' opinion about the pension agreement, while union FNV said it would decide today whether it would consult its rank and file.