PGGM integrates DC into main scheme
The €47bn PGGM scheme is a compulsory pension arrangement for the 950,000 or so employees in the Dutch healthcare and social work sector. Until May this year, the pension scheme was entirely defined benefit (DB) in orientation. This changed with the introduction of the PGGM Extra Pension, which provides a supplementary, defined contribution (DC) pension within the basic DB plan.
PGGM’s basic scheme provides a pension that, in combination with the state pension, will represent around 70% of an individual’s final salary if the individual participates in the pension fund for 40 years.
Until the end of the 1980s, occupational pension schemes, including PGGM’s, were uniform schemes. As pension schemes are provisions with long and sometimes very long-term effects, it is particularly important to be able to incorporate major social changes into the scheme. An example of an irreversible structural development is the current trend towards greater individualisation and flexibility. Employees are increasingly seeking to make individual choices within pension schemes in order to tailor their pensions more closely to their personal situations. This resulted in the 1990s in a fundamental restructuring of PGGM’s DB scheme. Around retirement age, participants can now opt for either just a retirement pension or for a combination of a lower retirement pension and a continuing entitlement to a surviving dependants’ pension. The early retirement pension has also been made more flexible and can be taken at any age between 55 and 65. Participants choosing not to take early retirement will receive higher retirement pensions for the rest of their lives once they reach the age of 65.
Although the compulsory collective pension scheme is now much more flexible than in the past, not all individual participants’ wishes can be fully met.
Over 80% of the employees in the healthcare and social work sector are women, who have often stopped work or reduced their working hours at various times in order to bring up families.
In the early 1990s, PGGM decided to set up an insurance company in order to enable participants to arrange additional pension provision. An insurance company had to be set up for this purpose because PGGM was a collective pension fund. As a result, the insurance company products have to meet certain minimum solidarity requirements and are, therefore, unmistakably products of a collective pension fund.
Against this background, PGGM incorporated two voluntary pension modules into its compulsory collective scheme. The PGGM Extra Pension allows participants to increase the pension rights that they build up within the compulsory basic scheme. Premiums are paid by individual participants and only permitted if they are within the overall tax-exempt allowance for pensions. One of the modules relates to the early retirement pension, while the other provides a lifelong retirement pension, together with linked risk insurance in the event of death. These modules have been structured as a defined contributions scheme.
When a person retires, the capital that has been built up will be used to buy an extra pension. This will be integrated into the pension that the person has built up in the compulsory scheme, meaning that the extra amounts will be indexed in the same way. The fact that an individual participant can use capital built up on an individual basis to buy a pension indexed to general wage and salary developments in the sector is unique in Holland.
The major advantages of PGGM’s DC provisions are that they tie in seamlessly with the basic collective scheme, while increasing flexibility.
Rights are also indexed to increases in wages and salaries, while the costs charged to participants can be kept relatively low.
Additionally, if an employee leaves the healthcare and social work sector, the extra rights can be transferred to the new employer’s pension fund along with the rights from the basic scheme. Furthermore, the integrated communications and advice available through PGGM on a participant’s overall pension position is invaluable to members.
PGGM believes that integrating individual modules based on a DC system into a DB scheme shows that solidarity and flexibility are not, as is often claimed, inherently contradictory, but can in fact be mutually reinforcing elements.