The Dutch pension system consists of three pillars, which are tightly connected. Interferences with one pillar almost always have consequences for the other two. Further characteristics of the Dutch pension system are the mandatory participation, its financing through capital funding and the triangular relation between employer, employee and pensions provider. 

First pillar
Anybody who lives or works in the Netherlands, is insured for the state pension AOW. This is a basic provision, which entitles a single pensioner to a monthly gross payment of ca. € 1,000 and a married person to ca. € 700 (excluding holiday allowance). The AOW is being build up during 50 years. Each year somebody between 15 and 65 doesn’t live in the Netherlands will lead to a discount of 2%. The AOW benefits are being paid as of the month in which the rightful claimant becomes 65. 

Second pillar
Almost every employee can claim a pension through the second pillar, which is being build up via the employer. This labour-based pension comes on top of the AOW, and so adds to it. Besides an old-age pension, most pension plans provide for a surviving relatives benefit. Sometimes, it includes a right to benefits for inability to work. 

The most common pension scheme is an old-age pension, based on the average salary a worker has built up during his entire career. These average-salary schemes have almost totally replaced the final salary schemes, based on employees’ last salary. Most common are DB schemes. 

The Dutch state encourages saving for a pension, by not taxing the right to a pension, the so-called pension claim. However, the final benefit is liable to tax. This is called the ‘reverse rule’. The fiscal legislation requires that the right to AOW is being taken into account for determining the pension amount. 

An employee’s pension must be placed outside the company of the employer, either with an industry-wide pension fund, a company scheme or a occupational scheme, or a life insurer. This way, the worker’s rights are protected in case his employer goes bankrupt.

The industry-wide pension fund carries out the pension plan for all workers in an industrial sector, for example the building industry or the care sector. A company pension fund is tied to one employer or a conglomerate of companies, such as Philips, Unilever or steelworks Hoogovens.

Occupational pension funds for professionals carry out the pension plans of the self-employed in the same profession, such as medical consultants or notaries. This paper only addresses industry-wide schemes. 

Third pillar
Workers can individually compensate a pension shortfall within the third pillar through an annuity. The contributions to a life insurer or a bank, can - within limits - be deducted from tax. However, the future annuity benefit will be taxed.

SECOND PILLAR

Although over 96% of Dutch workers are building up a pension within the second pillar, there is no obligation for employers to offer a second pillar pension to their employees. Employer and employee need to conclude a contract on the labour conditions. This will mostly happen through a collective labour agreement (CAO), which is binding upon all employers and employees within a sector. Once a CAO has been concluded, the pensions legislation is applicable. 

Triangular relation
The pension fund draws up the implementation rules, in which rights and duties of employers towards each other are laid down. Furthermore, the pension scheme formulates – in conformity with the pension contract and the implementation rules – the pension rules and regulations. This consists of the rights and duties between the worker and the pension fund. The pension scheme takes care of payment of the pension and provides the participants with information. 

Capital funding
During the build-up period employers and employees are saving to be able to pay the future pensions on the pension date. The pension fund manages the assets that have been raised by the parties involved. The entire scheme’s assets get a pension destination. 

ALM study
The risks of a pension fund are being properly mapped out through an Asset Liability Management (ALM) study, a survey of the assets versus the liabilities. The outcome is the basis of a strategic investment policy, which takes the pension liabilities of the scheme into account. 

Prudent person
For the interest of both active participants and pensioners, the assets must be invested in such a way that the safety, the quality, the liquidity and the return of the entire investment portfolio are secured. In line with this ‘prudent person principle’, pension funds keep an investment mix of equity, property, fixed income and other investment classes. Increasingly, they invest in a socially responsible way.

INDUSTRY-WIDE PENSION FUNDS

Industry-wide pension funds are private organizations, with the foundation as legal framework. The board of an industry-wide pension fund consists of employers’ and employees’ organizations from within the sector, the so-called social partners. They both occupy the same number of seats on the board. Social partners which want to establish an industry-wide scheme, only need to inform the regulator about their initiative. 

VB and the economic interest of its members
Industry-wide pension funds have joined the Association of Industry-wide Pension Funds (Vereniging van Bedrijfstakpensioenfondsen, VB). As such, VB represents the pension interests of 4.9 million employees, or three-quarters of Dutch workers with a collective pension scheme.

In addition, 8 million deferred participants are insured through VB’s members. The 78 associated industry-wide pension funds pay pension benefits to at least 2.1 million pensioners. No less than 350,000 employers are affiliated with VB. Among them are not only listed multinational companies, but also many small and medium-sized businesses. Their combined assets under management total approximately € 500 billion (at the end of 2007). By comparison, the entire Dutch GDP is € 528 billion (at the end of 2006). The yearly sum of pension contributions totals € 25 billion. 

Governance
The industry-wide pension fund is an independent legal entity, which is separated from employers and employees within its sector. The pension fund must organize itself in such a way that ‘proper governance’ is secured. These pension fund governance principles consist of directives for the skills of board members, transparency, accountability and internal supervision.

In line with the required participation, every industry-wide scheme must have a council of participants, comprising of members and pensioners. The participants’ council has legal rights, such as advisory powers on planned amendments of the pension rules and regulations, and the foundation’s constitution. The advisory rights also apply to the conclusion of the annual report and the conclusion or amendment of the policy on allowances. 

Mandatory participation
The social partners establish the framework of the pension scheme in the CAO.

Employers’ and employees’ organizations in an industry sector can request the minister of Social Affairs and Employment to declare the participation in an industry-wide pension fund mandatory. This governs the compulsory participation of all employers and workers in the industry-wide fund, which in turn has the duty to accept all employees who qualify for a pension.

A main goal of the mandatory participation is solidarity between the generations of workers, between the healthy and the incapacitated, and between male and female employees. Because of the lack of competition on the labour condition of pensions, there is also solidarity between the employers in the sector. 

The industry-wide pension fund can exempt an employer of mandatory participation. This is possible in connection with existing pension arrangements, in case of the creation of a group of companies or insufficient returns on investments at an industry-wide scheme.

However, the pension fund is allowed to attach conditions to the exemption. The employer must place the pension scheme - it must be equal to the arrangements of the industry-wide fund - with a company pension fund or a life insurer. 

Average contribution
The mandatory participation implies a limitation of the market forces. However, this is considered justifiable, because of the solidarity principle, which is the basis of the system. Solidarity is being achieved by levying an average premium: the owed contribution is equal for all participants, or is an equal percentage of their salary.

The average premium – decided by the pension fund – is divided among all affiliated employers, and is based on the average earnings or another criterion. The make-up of the staff (for example, relatively many young workers) doesn’t affect the premium to be paid by an individual employer. This depends on the total population of the pension fund. So there is no direct relation between the yearly contribution payments and the worker’s pension build-up in a given year. 

Scope for policymaking of the board of a pension fund
The board of a pension fund is supposed to take the interest into account of all active participants, deferred members, pensioners, affiliated employers and other parties concerned. This balanced approach to all different interests is the foundation of policy making.

The board has several steering instruments at its disposal. For example, the board will take a decision on the amount of the premium. The financial situation at the pension scheme is normative for the question if the contribution will be adjusted. The CAO negotiators decide how the contribution is divided-up between employer and employee. 

Other steering instruments are:

• Changing the arrangements of the pension plan (for example, a shift from final salary to average salary).
• Decreasing the pension build-up by taking into account a larger AOW contribution to the total pension entitlement.
• A yearly decision on indexation, e.g. an increase or a decrease.
• The discount of the pension build-up in a particular year.
• The devaluation of built-up pension entitlements, as a last resource.

Minimum assets and indexation
A pension fund must have minimum assets at its disposal. Its size must allow the scheme to meet its liabilities. An average pension fund has to keep such a financial buffer that its coverage ratio (the ratio between its assets and its pension liabilities) is approximately 130%. This is based on the norm that once every 40 years (a risk benchmark of 97.5%) a chance of under-funding is allowed. 

A conditional indexation is nowadays part of nearly all schemes carried out by industry-wide pension funds. The extent of indexation is usually linked to the coverage ratio. The pension fund must explicitly communicate the conditionality of the indexation with its participants. There has to be a consistency between the promised indexation, its financing and the information provided. 

External reporting
Participants must be able to find out whether a pension fund is able to fulfill its (future) obligations. Therefore, the sufficiency of its assets is the foundation of its financial accountability. A scheme must keep a special provision for pension liabilities (VPV) on its balance sheet for all its unconditional liabilities. As of 1 January 2007, the pensions legislation requires that the VPV is being valued at the current market interest rates, and at the level of the actual accounting date. The assets of a pension fund are being rated at their actual value as well. 

IAS
The international accounting rules also affect pension schemes that are being carried out by (mandatory) industry-wide pension funds. In VB’s opinion, they qualify as multi-employer plans, and therefore in terms of accounting, can be treated as defined contribution (DC) schemes.

The affiliated employers are solely bound to pay an - in advance agreed - contribution. An employer who has paid the owed premiums is not liable for any possible shortfall of the pension fund. Moreover, an employer can’t claim any possible surplus either.

In case the IAS rules prescribe DB accounting, there is no reliable distributive formula to calculate the proportional share of pensions provision, investments and costs for each individual employer.
For more information consult the paper Collective agreements with risk sharing between all stakeholders.