Dutch pension funds allowed to index pensions above inflation

According to a new interpretation of the law, Dutch pension funds can increase pensions by more than inflation if they did not provide full indexation last year. Inflation is expected to fall to around 0% this month after hitting a record 17% last year.

According to Ger Jaarsma, the president of the Dutch pension federation, the law that introduced relaxed indexation rules for pension funds that have promised to make the switch to the new defined contribution (DC) system by 2028 allows for this.

“Under the relaxed indexation rules, pension funds also have the option of including non-awarded indexation from the previous year in their consideration,” Jaarsma said.

This is especially important for funds that use September or October as their indexation benchmark, such as healthcare scheme PFZW and Bpf Bouw, the fund for the construction sector.

These funds faced extremely high inflation of around 17% in autumn last year. Compared to this peak in inflation, prices have not risen or even declined slightly since.

If the affected funds could only take into consideration year-on-year inflation, they wouldn’t be able to increase pensions at all, even though they often have funding ratios that leave room for it.

One example is PFZW: it increased pensions by 6% last year while inflation was 17.2%. PFZW said in an emailed response that the difference between inflation and indexation provided last year will be “one of the factors” the fund’s board will weigh when it takes a decision on the matter in November.

Of the largest five funds, only civil service scheme ABP provided full indexation last year.

Marc Heemskerk, a pension consultant at Mercer, confirmed Jaarsma’s view that any indexation space that was not used last year can be used now. But he added that this is “not always a solution” because, in light of the transition to the new system, some pension funds want to keep a larger buffer than strictly necessary with a view to the upcoming transition to a new DC-based pension system.

This article was first published on Pensioen Pro, IPE’s Dutch sister publication. It was translated and adapted for IPE by Tjibbe Hoekstra