News & Events

Changes to Pension Plans: Three Parties, Three Changes

Submitted By Firm: Boekel De Nerée

Contact(s): Eugenie Nunes, Sascha C. Kuit

Author(s):

Eugenie Nunes and Leopold Ecker

Date Published: 7/2/2013

Article Type: Legal Update

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Gone are the days when pensions were a quietly tucked away asset. In recent years employers and employees have witnessed many changes in the pension landscape and the end is not yet in sight. No sooner has the state pension age and retirement age been raised when the Dutch House of Representatives has adopted a bill to downwardly adjust the maximum accrual rate that is eligible for tax relief. The bill also includes a proposal to end tax relief on pension accrual on the part of the salary in excess of €100,000 in the no-so-distant future.1

All these measures will mean changes to most pension plans – yours may be among them. This newsflash looks at the legal aspects of pension plan changes.

Triangular relationship

A pension plan is harder to change than other conditions of employment. A pension is one of the few conditions of employment that involves three parties: (1) the employer, (2) the employee and (3) the pension administrator (pension fund or insurer).

Hence, any changes to a pension plan must be effected in a triangular relationship and in various documents. The pension as an employment benefit is based on a pension agreement, in which the employer and employee agree on the kind of pension the employee is to receive. Often, a pension agreement is part of the employment contract or incorporated in a collective labour agreement. Only seldom is it a separate agreement. The employer is obliged to place the implementation of the pension agreement in the hands of a pension administrator. Agreements between the employer and the pension administrator on the implementation of the pension plan (e.g. premiums, indexing, etc.) are set out in an administration agreement. The relationship between the pension administrator and the employee is determined by the pension regulations where the employees derive their exact pension rights and obligations.

Pension agreement

Changes to a pension agreement (between employer and employee) usually follow the same procedure as changes to any other condition of employment. A pension cannot be changed unilaterally unless the contract of employment contains a clause to that effect. The employer must then be able to produce weighty reasons for a unilateral change. Needless to say, employees and employers may also change a pension agreement with mutual consent, either individually or collectively (through consultations on the collective labour agreement). Up to this point, changes are made to pension plans in much the same way as they are made to any other condition of employment. However, in the case of pensions, the change may not impugn pension rights that have been accumulated up to that moment (Section 20, Pension Act). Changes may be made to accumulated rights only in specific cases concerning a reduction or a transfer of accrued benefit. It will depend on the details of the pension agreement whether and – if so – how far the agreement itself must be altered when a concrete change is made to the pension plan. Some pension agreements are very detailed, but most refer only in a general sense to the current plan and regulations. The details of the plan are then set out in the pension regulations.

Pension regulations

The pension regulations are therefore almost always adjusted when changes are made to the pension plan. This is often regarded as the most important adjustment because the regulations contain the details of the pension plan and it is on the basis of the regulations that the employees derive their direct rights and obligations. The way in which changes to the pension regulations are implemented depends largely on the type of pension plan. Basically there are three types: a) pension plans administered by an insurer (insured pension plans); b) pension plans administered by a corporate pension fund; and c) pension plans administered by an (obligatory or voluntary) sector-wide fund. All three are explained briefly below.

  1. Pension plans administered by an insurer are subject to the provisions of the Works Council Act (Wet op de ondernemingsraden), which accords the Works Council right of assent to decisions concerning the establishment, amendment and withdrawal of a pension insurance.2 However, if the deal has been agreed by social partners in the collective labour agreement, the Works Council cannot influence proposed changes because, under the law, the unions take precedence over a Works Council in negotiating primary conditions of employment (and this also holds for other employment conditions than pension).
  2. If the pension plan is administered by a corporate pension fund, the Works Council does not share in the decision-making on changes in the regulations.3 The employees’ interests are protected in other ways: they usually have their own representatives on the pension fund board. The fund will also have a participants’ board made up of representatives of current employees, past pension plan participants and retirees, which has the right to advise on changes to the pension regulations. The pension fund board may choose to ignore this advice but the participants’ board can then lodge an appeal with the Enterprise Chamber of Amsterdam Court of Appeal. In every decision that they take, pension fund boards are statutorily obliged to weigh the interests of employees, former participants and retirees against each other equally.
  3. Finally, an employer may participate in a sector pension fund in an obligatory or voluntary capacity. Changes are then agreed by the social partners, who also negotiate the conditions of employment for that sector, and are normally represented on the pension fund board. As a result, individual employers and employees have little or no scope for negotiation. Employers who are exempt from obligatory participation in the pension plan of a sector pension fund will, however, still have to consider carefully the implications of any change for their own pension plan or insurance. Most sector pension funds will grant a dispensation only upon the condition that the rights in an exempt pension plan are on a par with those in the obligatory plan. The employer may then have to seek the approval of the Works Council or negotiate with the unions, though the room for manoeuvre is limited by the conditions for dispensation.

Implementation agreement

In some cases a change to the pension agreement and/or pension regulations will necessitate a change in the relationship between the employer and the pension plan administrator, as set out in the administration agreement. If the pension plan is administered by an insurer (and is not a sector or corporate pension plan) the Works Council and the representatives of the retirees have the right to advise on the administration agreement and any renewals. The situation may also differ if pension plan insurance has been agreed by social partners in a collective labour agreement. Frequently, there is no administration agreement between the employer and an obligatory sector pension fund. The administration conditions in such cases are stated in the pension regulations or on a separate declaration of affiliation. This is only logical, given that the administration agreements for the pension plans of a sector pension fund are reached by social partners at sector level, thus rendering the need for separate agreements with individual employers superfluous.

Each change requires a different approach

This is only a general description of what happens when changes are made to a pension plan. In effect, every change must be closely scrutinised to determine whether it only requires changes to the pension agreement, the pension regulations or the administration agreement or to several of those documents together. Often, only minor – technical – adjustments are made to pension regulations, which have no further implications for the pension agreement. In these cases the pension fund board may be empowered to amend the pension regulations without seeking the consent of individual employees, in contrast with changes which have clear implications for the pension agreement. An employer must judge each case separately and never hide behind the decisions of the pension fund board or the insurer. As indicated above, whether advice or consent is required first from the Works Council will also depend on the type of pension plan and the nature of the change. Finally, many pension regulations and administration agreements contain additional procedural rules for the introduction of concrete changes.

All in all, each time a change is considered, a clear inventory must be drawn up of the required steps and the parties involved. Pension regulations are complex and so – unfortunately – are changes. Early identification of potential obstacles and expert and strategic advice are crucially important.

___________________________
1 On the date of publication of this newsflash it is still unclear if the Senate will adopt this bill.

2 Formally, this condition applies to all concrete changes to pension agreements.

3 Recently the Dutch House of Representatives adopted an amendment to the Works Council Act, which also accords Works Councils right of assent to the establishment or withdrawal of a pension agreement at a corporate or sector pension fund. It does not, however, apply to adjustments to regulations already placed with a corporate or sector pension fund. The proposed amendment is still to be tabled in the Senate.

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