Pension-related compensation in practice: “It’s a shared responsibility”

The pension transition process in the Netherlands is well underway. But pension providers and employers are grappling with various issues surrounding the implementation of pension-related compensation,  ranging from unclear disclosure requirements to questions about what to do during reorganisations. In this article, lawyers Irina Timp and Eva Schram from De Brauw Blackstone Westbroek discuss the disputes that have already emerged, those they expect further down the line, and the things that employers often overlook. For the article in Dutch, click here.

The Dutch Future of Pensions Act (Wtp), which came into effect on 1 July 2023, needs to be implemented by 1 January 2028 at the latest. This new legislation radically reforms the Dutch pension system, including transitioning from defined benefits (DB) to defined contributions (DC). “This creates a shift in risk,” explains Timp. “Under the old DB system, the pension benefits were, in principle, fixed. The Wtp’s DC system, however, has fixed contributions. Pensions are now much more individualised, and people have more choices. This makes it more important to provide people with the right information.”

Slipping through the cracks

Under the new pension system, everyone in principle receives contributions at the same maximum rate of 30% of their pensionable salary, irrespective of age. This contrasts with the current age-dependent contribution scales, which can reach up to 40% in the highest age bracket. Timp says: “As a result, employees have a different outlook than they might have had under the old system. In such cases, compensation may be warranted.”

However, not everyone will have to deal with pension-related compensation. Employers with insured pension plans often make use of the Wtp’s transitional arrangements and keep the existing, age-dependent contribution scale in place for current employees. In these cases, there is no need for compensation. “But we are often asked how to deal with employees who switch jobs and end up at a company that uses the flat-rate contributions of the new pension system,” Timp explains. “This can happen when people leave voluntarily, are made redundant or change employers as a result of a merger or takeover. The contribution scale does not transfer to the new employer and as compensation is not at issue, this group could slip through the cracks.”

A matter of choice

Pension-related compensation comes in two forms: compensation added to the salary as a taxable allowance (in de loonsfeer), and compensation built into the pension plan (in de pensioensfeer). The latter qualifies for tax relief. To this end, the contribution limit on pensionable salary has been temporarily raised from 30% to 33% until 1 January 2037. That means that the amount is not simply paid into the employee’s bank account, but is added to their personal pension pot instead. For younger employees, this compensation can continue to yield returns for decades, meaning the sums involved can ultimately be substantial.

Providing compensation within the pension plan is an option under the Wtp. “That said, it isn’t compulsory,” Timp notes. “Even so, many employers who don’t opt for the transitional arrangement choose this route: you’ll find this form of compensation in virtually every transition plan. Ultimately, employers and social partners decide what pension-related compensation looks like, so there’s plenty of room to shape it. In practice, there’s a lot of variation.”

A single point in time

Many employers are currently transitioning to the new system, often choosing to do so at a specific moment in time. Pension funds link compensation to the transition date (that is, the point that the new scheme will start). As each employer may set its transition date with the ultimate deadline being 1 January 2028, the reference date used for compensation can vary significantly from one plan to another.

“This method of compensation depends heavily on your individual situation at that time, such as your age, your salary, and whether you work full-time or part-time,” Schram points out. If your employer switches to the new system on 1 January 2027, for example, and there is one-off compensation granted, the amount of your compensation will be based on your circumstances on that date. 

Missing out or doubling up

This means that, sometimes, the reference date can work against the employee. For example, if an employer switches to the new system shortly after an employee changes jobs, takes a sabbatical or temporarily works fewer hours for personal reasons, the employee may miss out on compensation or receive less than expected.

The opposite can also happen. “Someone might miss out by leaving just a bit too soon but get an equally good or even better deal with their next employer,” Schram continues. “It can even be more calculated: lining up their leaving date with their start date elsewhere so they qualify for compensation twice.” Yet, the compensation is linked to pensions that would be accrued if the scheme had not changed. So, it is not linked to your years of service.

A sensitive issue

Taking a sabbatical or changing jobs is usually the employee's own decision. But reorganisations are different in that employees don’t choose to leave. Their contract’s end date may also fall just before the transition date, causing them to miss out on compensation. In practice, Timp and Schram have noticed that works councils and unions have this issue on their radar and are increasingly pushing to secure compensation arrangements during negotiations.

But that’s not the purpose of pension-related compensation, Timp emphasises. “Compensation is meant to offset the pension accrual that employees will miss out on in the future, not to make up for losing one’s job.” Reorganisations are especially sensitive, because compensation is often funded from the pension fund’s assets. After all, that money can only be divided up once. The collective foots the bill. 

Collective struggle

Some pension providers and employers are therefore experimenting with voluntary continuation. In this scenario, employees remain enrolled with the pension provider for a short period after leaving, enabling them to still qualify for compensation. Although their employment has ended, their pension continues to accrue since they are still paying in. Strictly speaking, voluntary continuation is a matter between the former employee and the pension provider. While employers may want to help with the best of intentions, they should tread carefully.

Open the door a little wider each time, and more borderline cases follow. “I think it’s a collective struggle,” admits Timp. Schram adds, “Imagine another wave of layoffs in two months. Would you offer that option again? Whatever you decide, it won’t feel fair to everyone. Plus, the legislature set a clear reference date for the transition.” And there’s another catch, Timp warns. Voluntary continuation isn’t always advantageous. “If an employee is also building up pension savings elsewhere, the combination may lead to an excess pension accrual. This means that more pension has been accrued than is permitted for tax purposes, so the entire pension becomes subject to tax.”

A duty to inform

Given how far-reaching the consequences can be, it is important to provide clear information. Employers must adequately inform their employees, so that they can make the right choices. For pension providers, this duty is explicitly set out in law and has been expanded by the Wtp under headings such as decision-making support or duty of care. Employers, however, often have no such specific legal duty. “Instead, the question falls back on article 7:611 of the Dutch Civil Code,” explains Timp, “the standard of being a good employer.”

Timp then points to the KLM ruling − a case that was not about pensions but shaped how courts assess whether an employer has a duty to inform and how far that duty extends. Two pilots were hit with unexpected additional tax bills after a tax treaty had been amended. “The issue was whether the employer should have made them aware of this,” Timp explains. “The Dutch Supreme Court said this depends on the specific circumstances of each case, including the employee’s knowledge and background, and how badly they would be affected by not knowing.”

According to Timp, this legal precedent can easily be applied to pension-related compensation. “If someone is a pension or employment law expert who helped shape the compensation arrangement, you can expect them to have more knowledge than someone in a more hands-on profession who is unfamiliar with the terminology.”

Nitty-gritty details

Timp and Schram believe the responsibility for informing people should be shared between the pension provider, the employer and the employee. Employers have closer insight into their employees' personal situations, while pension providers are usually better placed to calculate the actual compensation. Those calculations are often unavailable well before the transition date,” Schram clarifies. “Compensation agreements are linked to things like length of service or age group, but the exact outcome isn’t set in stone straight away. Employees, however, may need to make certain choices that may impact the amount of compensation at a moment where the exact impact cannot be assessed.”

Schram adds, “An employer doesn’t need all the nitty-gritty details to be able to inform their employees about the consequences.” Timp and Schram therefore advise employers to start informing people as early as possible, even if the final figures have not yet been confirmed. “This can be done in accessible ways, like via the intranet,” Timp points out. “As details emerge, employers can get more specific and tailor their guidance accordingly.”

Fair compensation

According to Timp, compensation can also factor into the ‘fair compensation’ (billijke vergoeding) employees can claim following their dismissal, in addition to the statutory transition payment. This typically applies where the employer has engaged in grossly culpable conduct. “Calculating fair compensation means comparing what actually happened with what would have happened had there been no grossly culpable conduct,” Timp elaborates. “What would have happened if the employee’s job hadn’t ended prematurely? Say, if it had continued for another year or two, would they have been entitled to compensation? If so, that could factor into the final calculation.”

However, Timp adds an important caveat: an employer could argue that the employee left earlier, and still went on to receive compensation at their new job. “I expect to see rulings on this before long.”

Pension-related compensation is not the only sticking point in the pension transition process. Please do reach out if you have any questions. To stay up to date, sign up for our newsletters or follow us on LinkedIn.