Pension under the new Future Pensions Act: more than just your investment pot
The Future Pensions Act has set the stage for everyone to have their own pension pot. Pension expert Roos van der Velden says it’s important to clear up misconceptions about pension investments. ‘Also pay attention to other aspects of the pension scheme. They’re at least as important as the investment choices you may or may not make.’
Investing with your pension works like this: if share prices fall, it’s bad for your pension accrual and if they rise, it’s good news, right? Van der Velden regularly encounters such fallacies and points out how there is often a one-sided view of how investing and retirement are related. ‘That’s why proper information from HR is essential. In defined contribution schemes, investments currently follow the life-cycle principle: taking less risk as the retirement date approaches. In practice, this means investing less in equities and more in bonds. If interest rates rise, as is now the case, the value of government bonds falls. As a result, people a year away from retiring see their pension pot depreciate by tens of thousands of euros. Security is wiped out, you might think. Except that their expected pension stayed the same because of the rise in interest rates. The amount to be paid out also depends on that interest rate. On retirement date, the pension provider looks at what return it can make on the accumulated capital and uses the current interest rate for that purpose. So if interest rates are higher, you can still receive the same pension benefit with a smaller pension pot. This is the kind of thing that HR needs to explain to employees.’
Investment choices receive too much attention
The question is whether the investment aspect dominates the pension debate too much. Van der Velden thinks so. ‘Suppose you make no investment choice at all as a pension participant. In this case, the investment will be made properly for you in line with ‘the average Dutch person’. If share prices are high, that’s great for the money already in the pot, but less so for the contribution, because you are buying in at a high price. And if there is a stock market crash, the opposite will be true. So things do even out nicely on balance. And as you approach your retirement date, risk is taken out of the investments.’
Because the choices are much greater in the pension schemes of insurers and PPIs than in pension funds, proper guidance is much more important there. ‘And that’s not just because the Future Pensions Act has entered into force now,’ says Van der Velden. ‘Those opportunities already existed, although employees and HR often don’t know that. Many people think they have to continue working until their state pension age, but that’s not the case at all. For example, you may draw your pension earlier or take a state pension bridging amount from your pension pot. Sometimes this is a very viable financial option. Too few people know it, that’s all.’
Start with an overview
As far as Van der Velden is concerned, providing retirement guidance to employees starts with offering insight, such as visualising the options available to people over 60. Mijnpensioenoverzicht.nl can help in this regard: ‘Sit down one-on-one with people aged 64-plus to see what they can do there: retire earlier, go on part-time retirement, convert retirement and partner pensions, draw high-low pensions, you name it. Mijnpensioenoverzicht summaries all the pension rights someone has, while the participant’s personal page lists the options for each pension provider and what those options mean for the amount they will receive. People often know accurately how much they need on a monthly basis, so they’re good at estimating whether they can afford to retire earlier.’
To convert or not to convert partner’s pension
Providing insight is one thing, but without action it achieves nothing. So it’s important to give a perspective for action. One example is the situation in which you are a man with a much younger female partner. Van der Velden explains: ‘In this case, converting your partner’s pension into a higher retirement pension is not a good idea, as your partner will no longer receive benefits when you die. Your partner would be able to do such a conversion because they are much less likely to die before you. And then your partner might create the opportunity to retire early for themselves, when that partner’s pension would never be used. Employees can really use help with those choices. Although HR doesn’t necessarily have to do that, it helps if you know these things are possible. I believe all employers should facilitate individual advice.’
Pay attention to insured pension schemes
One point to consider is the transitional arrangement for defined contribution pension schemes. ‘We’re moving to what is known as a flat contribution: everyone pays the same percentage regardless of age. This puts older employees at a disadvantage because they will accrue proportionally less pension. Pension funds will compensate for this from their buffers. But insurers and PPIs have no buffers. For this reason, it has been decided that all employers at an insurer that applies an increasing age-dependent contribution may continue to apply this contribution if they so choose until the last participant retires,’ Van der Velden explains. ‘But that only applies to employees employed before 2027. If you’re hired after that, you’ll have an equal contribution regardless of your age.’
Many calculations are needed to decide whether to use the transitional right or to transfer at once to equal contribution and opt for the compensation of older employees. ‘The Works Council will never agree to a transfer without compensation,’ Van der Velden believes. ‘A lot of discussion is needed. HR is the first stop for employment conditions and will be able to identify the pros and cons correctly. The advantage of the transitional right is that you avoid the compensation issue and nothing changes for existing employees. Although that gives peace of mind, you will have to set up another scheme for new employees after 2027.’
In that case, you need to be able to explain properly where the difference lies. ‘A young employee who has an 8% pension contribution now, while the average rate in the new scheme will be 15%, will be surprised. You’ll have to explain to them that their percentage will keep rising the longer they are employed, while the new colleague will always remain at 15%. So you can choose: either stay and continue to grow, or transfer and stay at the same percentage forever. As HR, you need to have a clear picture of these things. And it’s not at all difficult to explain that!’
Surviving dependants’ pension to change
The surviving dependants’ pension is also undergoing changes under the Future Pensions Act. ‘Surviving dependants’ pension currently depends on the number of years of service you can complete at a company by the age of 68. Soon, this pension will simply be a percentage of your salary, regardless of years of service. With that comes the choice of what percentage to choose. Although the maximum is 50%, is that wise? Although it may still mean a reduction for some people, the surviving dependants’ cover may actually increase significantly for others and then the contribution will increase correspondingly.’
Another disadvantage is that the surviving partner who does not yet have a state pension will suddenly see a huge increase when they reach state pension date. ‘That can still take years, while your partner actually needs the money when you die. It may thus be smarter to opt for a 30% rate and take out Surviving Dependants Act shortfall insurance on top of that. This provides cover until your partner receives state pension, allowing for a far more even distribution of income before and after your surviving partner’s retirement date,’ explains Van der Velden.
Whether the issue is a Surviving Dependants Act shortfall, early retirement or the flat contribution, HR has a role to play in informing employees. ‘These are much more important issues than the investment choice – if you don’t make that choice, it’s not the end of the world. But being well-informed as HR so that you can provide advice about all these other things – that’s a must.’
