Pension changes for defined contribution schemes of expats in the Netherlands
In 2015 a new Decree on the international aspects of pensions affecting expatriate employees was published. Changes were proposed to allow more flexible retirement benefits for participants in a defined contribution (DC) scheme.
The Dutch Pension system is generally considered as one of the world’s best with high scores in the Melbourne Mercer Global Pension Index (which examines the pension systems of 20 countries). These changes further highlight the constant effort to enhance this system to the benefit of all involved.
Draft legislation on flexible retirement benefits
On 23 November 2015, the Government Minister responsible for pensions proposed changing the current Dutch Pension Act in order to enable more flexible retirement benefits for participants of DC schemes.
A DC scheme is based on the assets within each employee’s individual retirement plan and is built up through contributions from the employee and employer (usually a percentage of salary as a set amount), and tax relief from the government.
Currently, participants of a DC scheme have to acquire a fixed retirement benefit in the form of a fixed annual pension by the time they have reached pensionable age. Should the discount rate be poor at that time, the annual retirement benefit will be lower than if the discount rate were higher. The discount rate is a conversion factor used to convert a capital pension sum built up into an annual income, and reflects what the plan’s assets can reasonably be expected to earn in the future. This is affected by economic factors such as the prevailing interest rates.
Since the Pension Act requires lifelong retirement benefits for participants, there could be a major financial disadvantage for them. As a result in a similar move similar to the recent pensions freedoms introduced in the UK, the new draft legislation will give participants in a DC scheme the ability to choose flexible retirement benefits in the form of varying annual amounts in different years rather than the annual amount being fixed, based on the future rise or decrease in discount rate.
What does this mean for my business?
The obligations will reside with pension administrators of a DC scheme to inform their participants about the possibility to choose a flexible pension benefit by the time they reach pensionable age.
It is expected that the legislation will come into force from 1 July 2016.
New Decree on international aspects of pensions
On 9 October 2015, the State Secretary of Finance published a new version of the Decree on international aspects of pensions. The majority of the content of this Decree has not changed; however, there are two changes that should be noted for expatriate employees working in the Netherlands.
Firstly, pension contributions related to foreign pension schemes are now fully deductible for wage tax purposes in the case of expatriate employees from other European Union (EU) member states as well as European Economic Area (EEA) member states. In the past, this was applicable only to expatriate employees from EU member states.
Secondly, the number of years that pension contributions for foreign pension schemes are tax deductible has been increased from five to ten years only where the relevant tax treaty contains a mutual recognition of pension schemes.
What does this mean for my business?
It is recommended that companies examine whether the extension of the period for deductible contributions is more favourable for expatriate employees from EU and EEA member states. If so, a request can be filed to allow tax relief for contributions into a non-Dutch pension plan based on the new Decree.
Variable pension bill (in Dutch)
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