On May 30, 2023, the Dutch Senate approved the Future of Pensions Act, which requires defined benefit (DB) pension plans in the country’s quasi-mandatory occupational pension system to transition to defined contribution (DC) pension plans by January 1, 2028. The new law, which takes effect on July 1, was approved by the lower house of parliament in January. Population aging and a sustained period of low interest rates have financially strained the DB pension plans that currently cover about 80 percent of Dutch workers who participate in the occupational pension system. The new law is intended to improve the system’s sustainability by combining the individual pension wealth accrual of DC plans with some investment risk sharing among plan participants and an assurance of lifetime income in retirement.

In addition to requiring the transition from DB to DC pension plans, other key changes in the new law include:

• Ending age-based contribution rates: Contribution rates can no longer vary based on participants’ ages. Instead, all participants must pay the same contribution rates to their plans. However, DC plans that have age-based contribution rates in effect before July 1, 2023, are exempt from this change if they are closed to new enrollments by January 1, 2028.
• Setting a maximum contribution rate: Tax limits will apply to contributions instead of pension accruals, and the maximum contribution rate for old-age and survivor pensions will be 30 percent of covered earnings.
• Lowering the minimum entry age: On January 1, 2024, the minimum entry age for occupational pension plans will be lowered from 21 years to 18 years.
• Standardizing survivor pensions: Plans must standardize survivor pension qualifying conditions and express pension amounts as percentages of participants’ covered earnings or old-age benefits. The maximum survivor pension for a spouse or partner will be 50 percent of a participant’s covered earnings (for death before retirement) or 70 percent of the participant’s old-age pension (for death after retirement).
• Introducing solidarity mechanisms: DC plans must have solidarity mechanisms to smooth the effects of investment losses on pension benefits and ensure that retirees receive pension income for as long as they live.

Three types of DC plans will be allowed under the new law with varying levels of risk sharing and participant involvement in investment decisions:

• Solidarity defined contribution plans: These plans will follow a collective investment policy. Investment results will be allocated among participants according to allocation rules for each age cohort. A solidarity reserve will spread risks over different generations of participants.
• Flexible defined contribution plans: These plans will follow an individual investment policy with investment mixes varying across age cohorts. The individual accounts can experience financial gains and losses, but some risk will be shared through a collective reserve. Each mandatory industry pension fund will be required to maintain such a reserve.
• Defined contribution-capital plans: This variant is limited to existing plans that combine some characteristics of DB and DC plans. In these plans, starting 15 years before their retirement dates, the accrued pension assets of participants can be used to provide partial DB pensions. The investment risk and longevity risk of the pensions must be assumed by an insurance company or another risk-sharing institution.

Source: SSA International Update June 2023