Pensions matter, as they provide capital for later in life and cover risks. Due to diverse legal / tax / actuarial and product issues, expats are not always paying attention to pensions.
Make pensions work for you
Here are some guidelines to point you in the right direction, so that you can focus on tailor-made claims and prevent existing cost explosions:
Means of international expat pension coverage
- Coverage can be created by the company or by the expat personally.
- The pension plan might relocate with the expat to each new country or it might have to stay in one country.
- The coverage might be legally covered as a “pension” or as “insurance”.
It is essential that expats have a tailor-made pension plan at the lowest cost. It is recommended to examine your options thoroughly and consider the outcomes for your partner and family. Make sure you compare quotes to find the best provider for your needs, as differences can be substantial.
The Dutch Pension System
Pensions are covered by means of three pillars:
- Pillar 1: Governmental coverage for residents
- Pillar 2: Corporate coverage for employees
- Pillar 3: Private coverage by individuals
In this article, we will only focus on corporate coverage.
Corporate coverage
Only three kinds of pensions are allowed in the Netherlands:
- Old age pension
- Next of kin pension
- Disability pension
If it’s not possible to obtain the required coverage with a “pension”, it might be possible with an “insurance”.
DB versus DC pension plans
Defined Benefit (DB) pension plans provide a guaranteed amount of pension terms at pension age. There is neither investment nor interest rate risk, which makes these plans extremely expensive and old-fashioned, due to the historically low-interest rate.
Defined Contribution (DC) pension plans provide a guaranteed amount of pension premium. At pension age, a lifelong annuity has to be bought along with the acquired total pension capital. There are no guaranteed pension terms, however, there is a substantial amount of investment and interest rate risk. Most plans today have a DC nature.
PPI as DC alternative
Due to the historically low-interest rates, DB pension plans have become extremely expensive. For this reason, many companies have a DC pension plan. As of 2011, it is also possible to choose a Premium Pension Institution (PPI).
Generally speaking, a PPI has substantially lower costs, more flexibility and more choices than an insured DC pension plan. Thus, you should also look at the PPI possibilities for covering your expat pension plan.
Dutch Legal Restrictions
When formulating your wishes and the plan for your pension, pay attention to the following Dutch restrictions:
- The maximum amount of corporate-related pension wages in 2017 amounts to 103.317 euros.
- Pension wages have to be decreased with a 2017 franchise of i.e. 11.829 euros.
- In the Netherlands, product-related pension advice may only be provided by an AFM-licensed pension consultant. They must be independent from insurance companies and may only receive payment from their client.
International transfer of pension capital
In theory, it is possible to transfer pension capital from one country to the next. However, each country has its own legal and tax regime and Dutch legislation is rather strict.
Transfer from the Netherlands
A transfer of pension capital from a Dutch pension plan to another country is only possible if the pension plan in the next country has the same elaborate requirements as the Dutch pension plan; i.e. that its old age pension funding is capital based, that the capital is placed in a separate legal entity outside of the sponsoring company and that there will be no lump sum payout, only annuities.
Due to these requirements, the transfer is often not allowed.
Transfer to the Netherlands
Transferring pension capital to a Dutch pension plan from another country is generally less difficult. However, it is still advisable to carefully look at all requirements beforehand.
PEPP: Pan-European Pension Plan
The EU is working on the creation of a Pan-European Pension Plan (PEPP). One of the benefits of this proposed scheme is that it will be transferable across EU member states.
So far, expats do not yet have the possibility to acquire a work-related individual PEPP. The existing PEPP’s are collective and there aren’t many.
Of course, it is a welcome initiative from the European Commission to offer a proposal for a kind of PEPP where the 3rd Pillar is the private sphere and not the work-related 2nd Pillar. If individual countries provide tax benefits, it may be an alternative in a situation where there are no Pillar 2 alternatives. But with pensions, low costs and the benefit of scale, and therefore collective coverage, really do count.
It would be great for expats if an individual PEPP for the work-related Pillar 2 is created, with low costs and cost sharing. This is not easy to realise, of course, but it’s good to have a target and solution in mind!