The Dutch Pension System is built on three pillars. Depending on an individual’s circumstances, a retiree may receive benefits from just the first pillar, from both the first and second, or from all three pillars.
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The Three Pillars of the Dutch Pension System
The Dutch pension system operates on three key pillars, providing a combination of state, company, and private pensions
1. General Old Age Pensions Act (AOW)
The first pillar is AOW, the Dutch state pension, a basic income provided by the government to everyone who has lived and worked in the Netherlands.
The Dutch state pension provides a basic income, the level of which is linked to the statutory minimum wage. The General Old Age Pensions Act came into force in 1957 and is the foundation for the old age pension benefits.
This first pillar is a pay-as-you system. This means that the costs of the Dutch state pension is paid by social security contributions and additional funding coming from government public funds.
2. Company Pension Plan
The second pillar is a company pension plan, as employers in the Netherlands could offer a pension scheme. Companies are not legally required to implement a company pension plan, unless the government has made a pension scheme mandatory for en entire profession or sector.
When a company pension scheme is introduced it is often a Defined Contribution (DC) scheme. The retirement income received depends on the savings accumulated during the working years for the company.
When a company decides to offer a pension plan to its employees, it typically works with external providers such as pension funds, insurers, or brokers to establish and manage the pension scheme.
Pension funds are legally and financially independent and the financing is through capital funding. This means pension is financed by the contribution of employees paid in the past and from the return on investment of these contributions.
Types of Pension Funds
- Industry-wide pension funds: These funds serve entire sectors, such as construction, hospitality, or retail.
- Corporate pension funds: These are pension funds set up for employees of a specific organisation.
- Independent pension funds: These funds cater to self-employed professionals, such as medical specialists or dentists.
3. Private Pension Plans
The private pension plans are voluntary contributions made by individuals through private pension funds, offered by banks and insurance companies. They serve to top up the Dutch state pension and company pension scheme pensions.
Reforming the Dutch Pension System in 2023
The Dutch Parliament and their social partners have reached an agreement on reforming the pension Netherlands system: a future-proof and balanced pension system. The labour market is changing and over the past ten years people have become increasingly flexible in their way of working and living. However, the pension system has remained basically the same.
With this agreement in principle, the Dutch retirement provision is being modernised and at the same time, after long discussions (9 years) there is now clarity about the state pension age.
Among other changes, the agreement involves:
- Freeze of the state pension age: the pension age is frozen at 66 years and four months. The retirement age gradually will rise to 67 years in 2024. After that, the state retirement age continues to rise, but less rapidly than the government initially wanted. For each year that life expectancy rises, the state pension age will increase by eight months.
- The option to retire early: For employees born in 1955 to 1961 the option will be available to retire early.
- Abolishment of the Defined Benefit Plans: It will not be allowed to provide the Definied Benefits Plans [middelloonregelingen and eindloonregelingen].
- Prescribing flat rates for Defined Contribution Plans: Under this scheme, the employer makes available an annual contribution, which is spent on the employee’s pension accrual. This concerns an age-independent premium. The premium is more transparent what the amount of the accumulated capital is and how much pension the employee can expect based on this capital. However, the amount of the pension Netherlands benefit is not guaranteed because, in addition to the available contribution, this also depends to a large extent on the investment result.
The new pension Netherlands framework has come into effect July 1, 2023 and there is a transition period for pension providers up to 4 years to implement these new reforms.
The changes in this pension reform will have a significant impact on nearly all Dutch Defined Benefit Plans and Defined Contribution Plans, resulting in additional employer costs. Employers should consider these changes in any current salary planning, pension plan redesign or pension contract renewal. For more information follow the 10 steps in the Pension Netherlands Plan reform.
