'Levensloop': dealing with the next challenge
Consensus has always been regarded as one of the strongest pillars of the Dutch labour environment. The Dutch pension system in particular, invented by the socialist Prime Minister Willem Drees in the fifties, has played a crucial role in Dutch society and was based on intergenerational contributions and benefits. The pension system has always been something that the Dutch treated with pride.
Until recently, changes to this system have been the exception rather than the rule. However the pension system is now facing dramatic revision; 2005 has the doubtful honour of being the year that accounting for pensions has become more transparent due to the introduction of IFRS (IAS19). As a consequence, companies are taking measures to decrease the negative impact on their annual accounts. Pension changes will have an even greater impact in 2006: the new financial framework (nFTK) for pension funds will be introduced; the existing pre-pension scheme will no longer carry a tax advantage; and pension governance will become more prominent. All these changes demand a lot from both pension fund managers and company representatives responsible for employee benefits (human resources and finance departments).
Additionally, the government will introduce the Life-course (Levensloop) scheme on 1 January 2006. A Life-course scheme allows employees to develop a savings account in a tax friendly manner which can be used to fund various temporary leave options (Verlofspaarregelingen), such as early retirement, sabbatical or study. Although the Dutch legislators have built in an escape clause and will make a final decision in September, it is highly probable that the government will proceed with the implementation on the anticipated date.
The key question is how to deal with this next challenge; how will it affect companies, pension funds and employees? Is it primarily a human resources issue for the company or should it be addressed through pension policy? In this article we will try to answer the most important questions and demonstrate how ABN AMRO can assist companies and employees to implement Life-course arrangements in an optimal manner.
Characteristics of the Life-course scheme
The current Christian Democrat-Liberal coalition under the supervision of Prime Minister Balkenende has focused on two key issues in its labour policy; increased employment participation and more individual responsibility. The main objectives for the coalition introducing Life-course are to increase the retirement age from 62 to 65, to encourage people to be more responsible by transferring investment risk to participants, and to make leave options more flexible. It is probable that Life-course schemes will also become a vehicle for further
rationalisations such as unemployment and disability.
In summary the main features of the Life-course arrangement are:
q As of 1/1/2006 each individual will have the right to save for periods of unpaid leave or early retirement.
q Annual savings may not exceed 12% of the gross annual income.
q Employees are allowed to save up to 210% of current salary.
q No tax is applied if returns on investment take savings over this 210% threshold.
q These savings will not be subject to tax, but income tax will be applied to any withdrawal. Premiums need to be paid on employee insurance.
q The employer may also make contributions.
q Each year, employees choose between participation in a saving arrangement (Spaarloon) or Life-course.
q Employees have the right to participate but approval from the employer is required to use the
savings for an unpaid period of leave.
q The employee receives extra tax benefit of E183 for every saved year at the moment the savings are used for unpaid period of leave.
q After returning from unpaid leave the employee has the right to build the savings up to 210% again.
q The employer will be responsible for the execution, tax and control of the arrangement.
Key concerns for companies
Each individual employee has the right to participate in a life-course scheme, i.e. there is an implicit obligation for the employer to service an arrangement. Furthermore, the employee has the choice to use the offered corporate arrangement. Companies with a clear HR policy have to consider the following elements:
q What to do with the current pre-pension arrangement?
q Should they have an active HR policy for the Life-course arrangement?
Replacement of pre-pension
The employers will have basically two options in dealing with existing pre-pension arrangements; repair by allowing pre-pension to become part of an employee’s pension plan, or use the Life-course as an alternative for VUT or pre-pension. Repairing will mean higher costs for the company particularly in the light of the rapidly ageing Dutch population. Newspapers reported that in the past few months several companies returned to the negotiating table to discuss with the unions the existing pre-pension contracts as part of the new CAO agreements. Corus has decided to repair the
pre-pension scheme. Shell, among others, has decided to offer employees the new Life-course by paying a premium to the Life-course account; in this case employees that decide not to participate are entitled to receive the same premium as those who do. ING has decided to raise the retirement age from 62 to 65. Many more companies and industry
sectors will have to make decisions in the coming months.
Regardless of the results of these negotiations, companies cannot ignore the Life-course scheme. The fact is that employees will have the individual right to participate and companies will have the obligation to administer and control the individual accounts. Even if companies decide to leave the pre-pension scheme intact, very much against the will of the current coalition, they are powerless to refuse any employee who wishes to participate in the Life-course scheme.
Encourage or ignore?
Companies have the option not to actively encourage
the Life-course scheme and to leave the choice to its employees. As a consequence they may end up with many different providers (banks, insurers and pension funds) which could lead to an enormous administrative burden. Also, they could face problems with employees who want to make use of the scheme for certain purposes against the will of the employer. In order to prevent this and provide its employees with a good service, companies are advised to establish a Life-course scheme on a corporate level.
Diagram 1 shows that the decision criteria for companies are not necessarily in line with the decision criteria of its employees. Whereas companies are going to focus on administration and a single scheme, employees will be interested in higher rates and better investment opportunities.
In order for a company to successfully introduce a corporate arrangement it will have to take into account the needs of the employees and align with their venture council which can assist in persuading employees to accept the company’s preferred scheme.
Clearly there is not much time left for companies to implement a scheme unless
parliament decides to postpone the new Life-course legislation until 2007. Postponing is an option if a large number of
companies still have nothing in place in the new CAO, but Social Affairs Minister Aart Jan de Geus made it very clear that companies should do everything possible before September 2005 to make this Life-course arrangement a success. Essentially he linked his own political future to the implementation of Life-course in 2006. A
question mark remains as to whether providers of schemes such as banks and insurers are ready to execute them for companies and employees. There is strong lobby from insurers and pension funds against implementing the Life-course scheme in 2006 because their administration capabilities are not yet in line with the specific requirements.
Key concerns for employees
According to a study done by the Ministry of Social Affairs, 80% of the participants in the Life-course scheme will use the savings for early retirement. As there is no collective character to the Life–course scheme and individuals are allowed to choose their own investment strategy, it becomes increasingly important that participants are advised on investment horizons. A young person using the Life-course scheme for early retirement will have a different risk appetite than an older person. Also, if the Life-course scheme is going to be used for parental leave or a sabbatical, the risk return characteristics will be different. Life cycle products, which are basically generation products and more tailored to the needs of different appetites, will be a standard solution in schemes offered to employees. As the investment risk of the Life-course fund lies with the participant it is key that they are frequently informed of the risks and the value of the investment portfolio.
Certain aspects of the Life-course scheme will be decided in the CAO negotiations e.g. extra contributions by the company and pension contributions during the unpaid leave of the employee.
ABN AMRO offering
ABN AMRO is ready to provide a full Life-course scheme for companies. ABN AMRO is able to perform the administration of the Life-course product with the aid of the individual investment administration of the bank. This reliable infrastructure ensures that the administration is carried out efficiently and in complete compatibility with the salary systems used by companies or pension funds.
With a Life-course scheme, these accounts are provided in the form of a collective arrangement. The accounts are blocked and deposits are made through the salary administration. In conformity with the guidelines for Life-course, employees are not able to make deposits or withdrawals themselves.
Besides the ABN AMRO investment and saving funds, employees can also opt for investing in third party funds. Currently they can choose from a selection of funds of Robeco, Fidelity, Merrill Lynch, Delta Lloyd, UBS, Ohra and Triodos.
For each individual employee, the selected individual saving or investment profile is linked to the relevant account number. Deposits can be made daily - a daily check of whether deposits have been paid to the individual investment accounts is carried out automatically. If this is the case, these premiums are automatically and directly saved or invested in accordance with the most recent saving / investor profile.
After the first deposit, the employee is free to switch on a daily basis.
In the case of leave or termination of employment, the investments are sold (on the instruction of the employer and employee) and (parts of) the accrued deposit balance is transferred to the employer.
The reporting to the employee includes the following components:
q Employee’s brochure with general and specific information;
q Up-to-date balance information via the internet (Internet Banking);
q Daily statement (bought and sold notes) after each transaction;
q A life-course account statement (4x per year);
q A publication outlining the most important characteristics and performance details of the various investment funds of ABN AMRO and third parties.
The reporting to the employer consists of:
q A report stating the name and address details of the participants, contract number and the accrued value of the individual participant’s investment portfolio at the end of each year;
As the investment funds of ABN AMRO and third parties are all listed on the stock exchange, employees can keep track of the latest prices of the investment funds through various sources, including teletext, national newspapers and internet.
The employees can contact the Helpdesk of ABN AMRO directly with questions about the administration of their saving and investment account(s).
For more information on Life-course services please contact:
com +31 20 628 8658
For more information on any issues related to pensions please contact:
ABN AMRO Dutch Pension Team
firstname.lastname@example.org+31 20 383 6565
email@example.com +31 20 383 6567