What you need to know about the Netherlands’ new pension system

The Dutch government has officially voted in favour of implementing a new pension system - here’s what you need to know about the upcoming changes, and what they could mean for your pillar 2 pension. 

Dutch government approves plans for new pension system

Last week, the new pension system proposed by the coalition government cleared the final hurdle when it received majority support from the Senate (Eerste Kamer). While certainly a key step in the process, it’s taken years to reach this point. 

The initial agreement on the new pension system was made between employers, trade unions and the government in 2019, but discussions around revising the old system have been ongoing for around 15 years. More recently, the proposed system - known as the Future Pensions Act - has faced serious criticism from opposition parties. 

In the end, the Future Pensions Act passed in the House of Representatives (Tweede Kamer), with 93 votes to 48, and, on May 30 in the Senate, with 46 votes to 27. The four coalition parties, as well as the Dutch Labour Party (PvdA), GroenLinks, and the Reformed Political Party (SGP), voted in favour of the changes. 

Why is the Netherlands changing its pension system?

Simply put, the Dutch labour market has undergone significant changes over the last several decades. Not only has the way people work changed, but employees are also working longer and are more likely to switch jobs. All this while the Netherlands faces an ageing population.

The government has therefore opted to adopt a pension system that better reflects - and adapts to - contemporary careers.

What is the Future Pensions Act?

In essence, the Future Pensions Act is designed to ensure that the Dutch pension system is more future-proof, meaning it should be more in line with social and economic developments and the contemporary labour market. 

This means that when the economy is thriving, pension providers will more easily be able to increase supplementary pensions (i.e. it won’t take as long for pensions to rise following successful investments). For periods when the Dutch economy is struggling, the government has implemented a series of buffer measures to absorb as much of the potential losses as possible. 

Interestingly, the new system is not dissimilar to the pension system in place in Switzerland.

What will stay the same under the new system?

Much is changing, but the basis of how pensions are accrued in the Netherlands will stay the same. This means that the burden of accruing a pension will continue to be shared by both workers and their employers. Pension administrators then invest those funds and, eventually, pay out the pensions.

What changes will the Future Pensions Act bring?

Here’s a brief overview of some of the changes that will come with the implementation of the Future Pensions Act.

More transparency and flexibility in Dutch pensions

The Future Pensions Act should provide for a “more transparent and more personal pension system”, so information about how much money you’ve invested into a pension and how much has been accrued through investments will be clearer for workers.

Switching from one large pension fund to multiple individual funds 

As part of the switch to the new pension system, the Netherlands will transition from having one centralised pension fund at each pension provider - which is then shared amongst all customers - to having individual pension funds for each customer. This will help ensure that workers can access more personalised information about their pension accrual.

New contribution rules dependent on workers’ age 

Under the current rules, all workers pay the same pension premiums - into one collective fund - regardless of their age. This system has been criticised for being unfair, as the premiums paid by young people can be invested by pension providers for a longer period of time - meaning there’s more opportunity for young workers to absorb potential windfalls and setbacks.

On top of doing away with the collective pension funds, the new system will see changes in how workers invest depending on their age, so that young people are no longer investing in the pensions of older workers. This will also lead to reduced risks for investments made by older workers.

What are the implications for self-employed people?

The Future Pensions Act also includes measures to encourage self-employed people and workers who aren’t accruing a pension through their employer to better prepare for retirement. These measures include increased options for tax-friendly pension contributions from 2024, which experts say could help workers set aside an additional 10.000 euros a year without having to pay tax on it first.

When will the Netherlands switch to the new pension system?

Likely unsurprisingly, it’ll take a while before the Future Pensions Act is fully implemented. The law will take effect on July 1, 2023, marking the start of what is set to be a years-long transition period. Unions, employers and pension providers have until January 1, 2027, to adapt their pension schemes to the new legislation.

Who will the Future Pensions Act apply to?

The new rules will apply to all pensions in the Netherlands, although as mentioned above it’ll take a while before the new system is fully implemented.

The government notes that people mid-way through their careers (generally workers in their 40s) could experience some disadvantages as part of the switch. In order to make up for any losses to their pensions, the government is arranging a compensation scheme.

Most existing pension funds are expected to be transferred to individual funds over the course of the coming years - you aren’t legally required to make the switch, although in the long-term it's probably wise to go ahead with it.

How do people feel about the new pension system?

As mentioned above, the new system has faced some criticism over the years, with some worried that it will lead to increased risks, specifically for older workers. Generally, though, experts are confident that the Future Pensions Act will make pillar 2 pensions easier to understand and explain, and that it is more favourable to younger workers, self-employed people and people with flexible jobs and short-term contracts.

Dutch Minister for Poverty Policy, Participation and Pensions, Carola Schouten, is optimistic about the future of Dutch pensions. "This is an important step. With this law we ensure that our pension remains properly arranged, for the people who have already retired, for the people who work and for future generations,” she said in a statement.

More information about pillar 2 pensions in the Netherlands

If you’re confused about your own Dutch pension, or want to know more about the Future Pensions Act, be sure to visit the government’s website (in Dutch).

Thumb: ingehogenbijl via Shutterstock.com.