Pension Reforms: The Blueprint for a Sustainable Future

Pension Reforms: The Blueprint for a Sustainable Future
October 2, 2023 17 mins

Pension Reforms: The Blueprint for a Sustainable Future

Pension Reforms: The Blueprint for a Sustainable Future Hero Banner

New legislation is presenting employers with an opportunity to model sustainable pensions and modernize employment conditions.

Key Takeaways
  1. Sustainability is at the core of new pension reform, meeting the needs of the present without compromising those of future generations.
  2. Pensions will be more transparent and customized, with a high degree of solidarity and collective risk-sharing.
  3. To successfully navigate upcoming change, businesses must pay careful attention to taking the correct steps within strict deadlines.

With the aim of reducing pressure on social systems, the Future Pensions Act in the Netherlands is the first landmark event where a government has taken action to boost sustainability for the public good. The new legislation in the Netherlands is indicative of a global transition to sustainable pension models, with governments’ interests and influence bringing the topic into the public eye. In several European countries such as the Netherlands, Germany and Ireland, as well as the U.S., sustainability is at the heart of pension reform. Businesses will need to evolve their pension strategies in response to new obligations such as auto-enrolment to help their employees build a sustainable financial future.

How a Changing Pension Landscape Supports Employees

Under new legislation, businesses operating in the Netherlands will need to prepare to submit transition plans by January 1, 2025 — ahead of full implementation by January 1, 2028. Under this new legislation, all future accrual from 2028 onward will be based on a defined contribution (DC) flat rate. Defined benefit (DB) plans will no longer be allowed. As part of this transition, businesses will also need to implement auto-enrolment1 for all employees over the age of 18 with pension contributions at fixed percentages, among many other obligations. Every employer and employee will be impacted by the changes. No one will be exempt, and no one can challenge the transition, even though the courts. 

This legislation will fundamentally change the Dutch pension landscape in the years leading up to 2028 and point to a global transition. Inaction is not an option. All pension schemes will convert into DC schemes with more fluctuation in the benefit levels and much more individuality in both flexibility and choice. 
  
The Pensions Act will have significant impact on both future accrual and past accrued benefits. The reform will:

  • Allow employees more control over the details of their employment conditions in terms of salary and pension 
  • Provide pensions that are personal and transparent; more than ever, employees must be involved and aware of the changes in the new framework. Effective employee communication will be critical in supporting individuals through the transition to boost engagement with retirement planning 
  • Offer businesses new opportunities to change the narrative around retirement planning and position themselves to support employees’ financial wellbeing for the long-term

Employees’ Financial Sustainability is a Growing Global Business Focus 

The Dutch government may be underpinning this reform, but other countries are likely to emerge with similar transitional objectives. Many regions around the world are already drafting their own legislation, with similar concerns around retirement, social security, and pensions and how to keep them sustainable and fair. Other countries are establishing the framework for smaller-scale changes that are indicative of a global directional shift. Ireland for example, is likely to enforce auto-enrolment, ensuring employees have easy access to their workplace pension schemes, with the government contemplating quick application. 

There will be tweaks to retirement ages happening around the world as well, with Germany now allowing DC plans for employees. Schemes are also adapting to changing circumstances. In the U.S., an update to legislation — SECURE 2.0 — shares the same main objectives as the Dutch pension reform: boosting sustainability for both employees and employers and protecting financial wellbeing for the underserved.  

Navigating Auto-Enrolment: Actions to Take Now 

Pensions come at an enormous cost to both employees and employers, globally. For employers, this issue needs to be addressed by business leaders to ensure the pension strategy will have long-term impacts on operational costs and margins. For employers in the Netherlands: 

  • Transition plans need to be agreed with works council or unions by January 1, 2025.
  • Businesses should consider external governance as well as broader risks, such as selecting the right vendor and the right insurer(s) to manage associated risks, including cyber and environmental, social and governance (ESG).
  • Choosing plan designs will need proper governance, as well as the correct vendors/insurers to provide guidance.
  • As these changes can significantly affect costs, companies should expect head offices to oversee implementation of the scheme.
  • It is likely that older employees will require compensation, whereas younger employees will see more reward spend in their pension.
  • Cash costs and accounting liabilities and expense will be impacted, but the impact will depend on how pension schemes are currently organized:
      • Employers who are obliged to participate in an industry-wide pension fund (BPF)
      • Employers with insured plans
      • Employers with a company pension fund (OPF) or general pension fund (APF)

Companies in countries considering similar legislation can benefit by implementing similar measures when the time comes to plan their own sustainable pension reform.

The Global Impact of Sustainable Pension Reform

For businesses operating in the Netherlands — both domestically and internationally — focusing on immediate actions and deadlines, alongside identifying opportunities to implement sustainable best practices, will demand substantial resources. 

For larger multinational firms and smaller and independent businesses, collective retirement plans can provide a straightforward, effective and efficient solution to smooth the transition of pension reforms. Known as Pooled Employer Plans (PEPs) in the U.S. and Master Trusts in the UK and Europe, collective retirement plans can relieve leaders of time-consuming administrative burdens. They also have many cost benefits and robust governance structures overseen by objective external partners. 

This bold action by the Dutch government to promote sustainability of pensions plans will mean less pressure on social systems. The positive effects of the legislation are beginning to trend globally as the benefits become increasingly clear. 

Read more about Aon’s pensions and retirement solutions here: Pensions and Retirement

 

1 Although there is no mandatory membership of a pension scheme in the Netherlands, approximately 90 percent of employers have a pension scheme requiring adjustment.

Aon’s Thought Leaders
  • Hans Rekker
    Senior Business Development Manager, Wealth Solutions, Europe, the Middle East and Africa
  • Colin Haines
    Chief Commercial Officer & Head of Nordics, Wealth Solutions, Europe, the Middle East and Africa
  • Byron Beebe
    Chief Commercial Officer, Wealth Solutions, Global

General Disclaimer

This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.

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