VALUE TRANSFER OF PENSION RIGHTS IN THE NETHERLANDS. June publication no. 8A/04

Transcription

1 STICHTING VAN DE ARBEID REVISION VALUE TRANSFER OF PENSION RIGHTS IN THE NETHERLANDS June pubication no. 8A/04

2 Vaue transfer of pension rights in the Netherands 1. Introduction The opportunity to transfer pension rights when changing jobs, or what is termed vaue transfer, is a specia feature of the second piar in the Dutch three-piar pensions system. This brochure expains some detais of Vaue Transfer as such: its purpose and specific features, its advantages and disadvantages, the decision making procedure and costs. 2. The Dutch pensions system Given its direct reevance in this context, we must first expain the Dutch pensions system in genera. Taking retirement pensions as an exampe, the system divides into three separate piars as foows: - The first piar is the state retirement pension or AOW, based on statutory nationa insurance. This provides a inhabitants of the Netherands with a standard retirement pension at eve inked to the statutory minimum wage. It is financed on a cost-aocation basis, which means no pension fund is formed as such. Pensions are financed directy from nationa insurance contributions paid by the non-retired popuace. - The second piar is made up of non-statutory company pension schemes that are suppementary to state pensions. Suppementary pensions in the second piar are an integra eement of (coective) bargained wage agreements, and are financed on a capita funding basis. Empoyees save for their own pension through their own contributions (and those of their empoyer). Second piar schemes are administered by pension funds and ife insurers, who underwrite the pension payouts pedged by empoyers. - The third piar comprises private pension pans, unreated to statutory reguations or (coective) bargained wage agreements. Second piar pension provisions can be highy diverse. Up to the 1990s, most schemes were designed to provide a retirement pension equivaent (incusive of the state pension) to 70% of fina pay after 40 years participation in the scheme (fina pay scheme). Since that time there has been a shift towards a reference pension eve equivaent to average pay over the period of empoyment (average pay system). An increasing number of schemes are aso switching from pay-based pension eves to pensions funded entirey by actua contributions paid by empoyer and empoyee (avaiabe premium system). Many pension schemes are currenty based on a variant or a combination of these two main forms. Fina pay and average pay systems often make aowance in some way for the state retirement pension when assessing reference eves for suppementary pensions. 3. Vaue transfer in the Netherands In the Netherands the right to transfer accrued pension rights in the second piar to another fund with a new empoyer when changing jobs has been aid down by aw since mid Given that second piar schemes are financed on a capita funding basis, that means in concrete terms that the

3 actua accrued cash vaue of pension entitements is transferred. This vaue is then transated into pension entitements under the terms of the new pension scheme. The system is described as vaue transfer. Before becoming a ega right, vaue transfer had been possibe on a vountary basis, either by mutua agreement between empoyers and/or pension funds, or through vaue transfer circuits set up for that specific purpose. Purpose of vaue transfer Vaue transfer is designed to prevent or imit any oss of pension rights due to a change of pension scheme when switching to a new job. Such forfeiture of pension rights (hereafter termed simpy pension oss) is occurs specificay when the pension scheme of the earier empoyer is a fina pay scheme. In fina pay schemes the saary increments on which pension entitements are assessed are cacuated over a past years of empoyment 1. In average pay or avaiabe premium schemes, by contrast, pay increases count ony towards future pensionabe years. If an empoyee eaves a fina pay scheme, no account is taken of his years of service with the earier empoyer when cacuating his pension entitement in a new scheme, thus creating a pension gap. That is the most significant form of pension oss. Nowadays the accrued pension rights of an empoyee who oses his job are usuay index-inked in one way or another, thus mitigating any oss of pension. The exampes beow iustrate that in greater detai. Withdrawing from an average pay or avaiabe premium scheme ony creates a pension gap if the accrued pension entitements are no onger index-inked after the date of withdrawa, or at a ower ratio than in the active period. In practice this is very rarey the case, and transferring to a different pension scheme on changing jobs does not generay create a pension gap. Vaue transfer Vaue transfer means that pension rights accrued at the time of dismissa are transferred to the pension scheme of the subsequent empoyer. If the new pension scheme is a fina pay scheme, these rights have a number of (extra) pensionabe years attached. The number of years is assessed by reating the accrued retirement pension entitement to the retirement pension aocated on one year of pension accrua in the new pension scheme at the date of transition. When the pension schemes are precisey simiar and the pay eve is unchanged in the new job, the empoyee wi be aocated the same number of (past) pensionabe years in the new scheme as he or she in fact had under the previous scheme at the time of changing jobs. [footnote 1] Pensionabe years is understood to mean years of service, in so far as these are taken account of in cacuating pension eves. The usua imit is 40 years. Pensionabe years aocated through vaue transfer are taken into account in the assessment of pension eves. Loss of pension in the sense referred to above is thus at its owest when the vaue is transferred to a fina pay pension scheme with reguar aocation of back-service increases. In such schemes pay increases count towards the pension over a the participant s pensionabe years, thus compensating whoy or partiay for any pension gap occurring as a resut of changing jobs.

4 In the case of a move to a different type of pension scheme, vaue transfer does not give rise to extra pensionabe years. However accrued pension rights are usuay adjusted periodicay (in ine with wages or prices or otherwise). If the earier pension scheme was a fina pay scheme, the pension gap occurring on changing jobs is ony (partiay) offset if the adjustment poicy in the new pension scheme is more beneficia than in the previous scheme. If the earier scheme was an average pay or avaiabe premium scheme, the main 2 purpose of vaue transfer is to centraize pension rights accrued in the past with one soe pension administrator (and specificay in the form of the most recent pension scheme). This precudes fragmentation and makes the individua s pension position more transparent. This can be iustrated diagrammaticay as foows 3 : From To Pension gap Resut vaue transfer (in principe) Fina pay Fina pay Yes Positive, but cosure of pension gap dependent amongst other things on saary trend viz-a-viz indexation in the od pension scheme. Fina pay Average pay / avaiabe premium Yes Negative, as a pension gap wi in principe remain as a resut of eaving a fina pay scheme. However the transfer wi not be disadvantageous to the empoyee if the od and the new schemes have the same degree of indexation. Average pay / Avaiabe premium Fina pay No Positive, as no pension gap is created, but the impact does depend on saary trend viz-a-viz degree of indexation in the earier scheme. Average pay / Avaiabe premium Average pay / Avaiabe premium No Neutra, if earier and new pension schemes have the same degree of indexation. [footnotes 2 and 3] 2 Sti another consideration coud be the capita adequacy of the previous and/or the new pension administrator 3 This is a broad overview. The extent to which vaue transfer has a positive impact on precuding pension oss depends on individua circumstances, whereby in addition to the type, substance and eve of the pension schemes concerned, other reevant factors are changes in the saary/pension principes at the time of switching and the reative degrees of indexation in the previous and the new pension scheme. Given the arge variety of pension schemes, the persona circumstances of the participant and uncertainty about future deveopments, it can never be estabished with certainty beforehand whether or not vaue transfer wi eventuay prove favourabe to the individua concerned.

5 The vaue transfer process: the financia factor A standard method has been adopted for assessing the transferabe vaue of pension rights and its transation into entitements under the new pension scheme. This reguates the transfer process and forestas unintended side effects (such as pension oss stemming from administrators appying differing principes on fees and aocations to reserves). The same rues and principes appy both for the assessment of transferabe vaues and their transation into entitements under the new scheme. If the od and new pension schemes are identica, vaue transfer wi resut in pension rights precisey identica to entitements under the od pension scheme. In practice the (standardised) transferabe vaue wi sedom be precisey equa to the vaue avaiabe to the pension administrator reeasing it (usuay the accrued provision for pension iabiities). This is a consequence of the difference between the principes for aocations to reserves and the principes appying to transferabe vaue assessment. That difference wi work either to the credit or debit of the reeasing party (that is to say the previous pension fund or, in the case of directy insured schemes, the previous empoyer), depending upon whether the transferabe vaue is ower or higher than the avaiabe vaue. For the same reason the amount required by the new pension administrator to purchase the pension rights stemming from the transfer wi sedom be precisey equa to the transferred vaue. Here the difference wi work either to the credit or debit of the recipient party (that is to say the new pension fund or, in the case of directy insured schemes, the new empoyer), depending upon whether the transferabe vaue is higher or ower than the purchase sum. Given that there are generay both departing and new participants in one and the same pension fund, these differences offset each other to some extent. This is specificay true of pension schemes with arge memberships. For medium sized and sma companies unaffiiated to an industry-wide pension fund, and for smaer pension funds, vaue transfers wi amost certainy have either a positive or negative net impact on pension costs. The effects of this part of the vaue transfer process are presented diagrammaticay in appendix 2. The vaue transfer process: procedure Effecting a vaue transfer requires some considerabe effort on the part of a parties invoved: - the empoyee must take action; - information must be provided by pension administrators; - experts must provide advice; - a choice must be made by the empoyee ( and possiby aso his or her partner); - the transferabe vaue must be determined and the amount transferred to the new pension administrator; - the vaue must be transated into entitements under the new pension scheme, and in the case of a fina pay scheme, the reevant number of pensionabe years cacuated; - the outcomes must be entered in the accounts and reevant information again passed to the empoyee. A whoe process, in other words, taking up the necessary period of time. In order to ensure that empoyees take action and that the process is competed within a reasonabe space of time, the various stages of the process are subject to time imits. Appendix 3 gives an overview of the procedure and the reevant time imits.

6 4. Costs of vaue transfer Preventing a oss of pension costs money! Vaue transfer is intended after a to resut on baance in higher pension entitements. It is impossibe to predict the amounts invoved beforehand. They depend on the extent of the pension oss and the degree to which that is redressed. Another reevant factor is that in many cases an outgoing vaue transfer resuts in a saving if there is no requirement for the associated pension entitements to be index-inked. The costs of redressing the pension oss are borne by the new pension fund (the empoyers and pension scheme participants invoved) or, in the case of a directy insured pension scheme, by the new empoyer. New and expanding companies are thus the chief financiers. As aready indicated, differences between avaiabe vaue, transferabe vaue and purchase vaue are factors that can give rise to additiona income or expenditure on the part of the pension fund or empoyer, particuary in the case of medium sized and smaer companies Finay there are the costs of administering the whoe process, the communication, the assessment, the consutation, the actua transfer of money and the input of the transferred vaue into the new pension scheme. Vaue transfer invoves the necessary (administrative) exertions and can readiy cost severa hundred euro for each individua case. These costs are borne in the first instance by the pension administrators and are set off against the contributions due from empoyers and empoyees. Conversey, vaue transfer aso means the previous pension administrator has fewer pension entitements to account for, and thus saves on IT, accounting and communication costs. 5. Information provision As aready pointed out, in ight of the wide variety of pension schemes and the persona circumstances of individua empoyees, as we as uncertainties on future pay trends, indexation and adjustments to pension scheme provisions, it is impossibe to predict whether or not a vaue transfer wi work out in favour of the person concerned. And even in terms of the standardised form, vaue transfer remains a compex subject. Empoyees wishing to transfer their pension rights to a new pension scheme have a difficut choice to make. They require good information and support. The Joint Industria Labour Counci has produced an informative foder and a decision guide based on the main provisions of pension schemes. This documentation is incuded in appendix Summary The significance of vaue transfer as a method of combating pension oss attaches primariy to fina pay (or simiar) schemes, where pay increases ead to higher pension entitements over past pensionabe years. If an empoyee switches jobs, his or her previousy accrued pension rights wi no onger quaify for adjustment in ine with the individua s future pay trend. This resuts in a pension gap. That pension gap refects the difference between the pension the empoyee woud have received over past pensionabe years if he or she had not changed jobs and the (ower) pension he or she is entited to over these years after withdrawing from the scheme. The pension gap represents the pension oss due to switching pension schemes when changing jobs. Vaue transfer heps to offset the pension gap in whoe or in part.

7 In the case of average pay and avaiabe premium schemes, no pension gap occurs as a resut of changing jobs, and there is thus no oss of pension. In these circumstances vaue transfer heps carify the individua s pension position by consoidating pension rights as much as possibe in one soe pension scheme. Whether or not vaue transfer wi aso ead to a better pension in that situation often depends on (possiby unreiabe) comparisons between different forms of indexation. Most Dutch pension schemes currenty provide for index-inked rights on dismissa and indexation of pension payouts in one way or another. That means the probem is ess serious on the one hand, as it makes for a smaer pension gap. But it does not make it any easier for empoyees to decide whether or not to transfer their pension rights to a new pension scheme. This effect is ampified by the current trend towards dropping fina pay schemes in favour of average pay and avaiabe premium schemes. It is moreover increasingy uncertain whether pension schemes wi adhere to their existing indexation poicies. Good information is thus cruciay important. That is an area where improvement is sti needed.

8 Vaue transfer in the Netherands APPENDIX 1 Exampes of the impact of vaue transfer as a measure for offsetting pension oss through changing jobs I. What do we mean by pension oss? Peope who withdraw from a pension scheme on moving to a new job are aocated a paid-up pension entitement based on the number of pensionabe years they have accrued in the previous scheme. Such entitements wi usuay be periodicay adjusted, for exampe in ine with a wage or price index. Adjustment is in most cases conditiona on the financia resources being avaiabe. Switching jobs can mean pension benefits wi eventuay fa short of the amount that woud have been due on the basis of continued service with the previous empoyer. Such shortfas can be due to: a) Lower accrued pension entitements over the years remaining up to pensionabe age (there is no new pension scheme, the new pension scheme is ess generous, or pay does not rise at the same rate in the new job); b) Lagging subsequent accrua on previousy accumuated pension rights (due either to a ack of indexation or ower indexation than woud be required on grounds of the individua s pay trend).. This can be presented in diagram as foows:: Pensionabe earnings IV II III Pensionabe Earnings at resignation I age of entry age of pensionabe resignation age

9 I = Aocated pension entitement at resignation on a time-weighted basis. II + IV = Forecast subsequent pension accumuation over pensionabe years in the od scheme if the empoyee had stayed with the previous empoyer. This amount is in fact impossibe to estabish. II = Forecast subsequent pension accrua I in the od pension scheme through bonuses/ indexation (can be 0). IV = Forecast pension shortfa due to change of job (= II+IV-II) III = Potentia pension shortfa reating to the period after resignation assuming no participation in new pension scheme. I + IV = Tota forecast pension if empoyee had stayed with the od empoyer. The factor b) above (fied IV in the diagram) is the ony factor reevant to vaue transfer as a measure for imiting pension shortfa, if we ignore any divergence in pay rate trends due to changing jobs. Carrying over pension entitements by means of vaue transfer entais that these entitements, after transation into the provisions of the new pension scheme, wi subsequenty be treated as if they had been accumuated in the new scheme. In the case of fina pay schemes this invoves transation into extra back-service years which count towards pension increases assessed on the basis of a pay increase. For average pay and avaiabe premium schemes, treatment remains the same as for past accrued entitements (thus usuay adjustment to a specified index). Vaue transfer can ony have an impact if there is an appicabe pension scheme in the new job, and if that scheme provides for adjustment of pension entitements accrued over past pensionabe years. It shoud be noted that it is not aways possibe to estabish in advance whether vaue transfer wi indeed have the envisaged impact, because it is often a matter of assessing the difference between two different methods of adjustment (indexation in the od pension scheme and indexation poicy in the new scheme). There are in fact ony two situations where we can be certain in advance that vaue transfer wi hep to offset pension shortfa. Pension rights are frozen after resignation. The new scheme is a fina pay scheme, the empoyee has an income sti we beow any maximum appying in assessing the pension eve or there is no appicabe maximum and the empoyee sti envisages some further career advancement.

10 II The effect of vaue transfer, presented in diagram In vaue transfers the vaue of the aocated pension entitements at resignation is assessed on the basis of standard assumptions (discount rate, mortaity tabes etc.). No aowance is made for conditiona indexation of entitements. This transfer vaue is paid by the reeasing pension administrator to the new pension administrator. It is then transated on the basis of the same assumptions into pension entitements under the new pension scheme. Under current reguations this sti invoves a number of notiona factors designed to ensure that retirement pensions remain as far as possibe intact. Proposas have meanwhie been advanced to aboish these factors so that the vaue and the assessment principes are the ony determinants for cacuating pension entitements stemming directy from transfers. Different types of pension scheme, differing reationships between the same types of pension and a differing pensionabe ages are factors making for divergence between the od and new pension entitements. In the case of fina pay schemes a number of years are aocated to the new pension scheme as counting towards subsequent pension assessments. This number is generay defined as the new retirement pension entitement stemming from the transfer, divided by the retirement pension entitement per subsequent pensionabe year, assessed on the basis of the situation at the time of entry to the pension scheme. The transferred pension entitement is then whoy incorporated into the new pension scheme. If the two pension schemes are identica (that is to say the od pension scheme was aso a fina pay scheme) and the pay eve at resignation coincides with the entry pay eve in the new scheme, then the number of pensionabe years stemming from the transfer coincides with the number of pensionabe years accumuated in the od scheme. A different earnings eve in a new job however yieds a different number of years (higher pay resuts in fewer extra pensionabe years in the new scheme). Different types of pension scheme, differing reationships between the same types of pension scheme and a differing pensionabe ages wi ceary aso ead to diverging numbers of pensionabe years stemming from vaue transfers. It is then unsurprising that the current mutifarious assortment of pension schemes is not much hep to empoyees trying to decide whether or not to request a vaue transfer. The foregoing points are iustrated in the foowing exampes.

11 Exampe 1: transition to an identica pension scheme with unchanged pensionabe earnings This exampe demonstrates what happens when an empoyee transfers to an identica pension scheme (in this case a fina pay scheme). This situation is iustrated in the foowing diagram., diagram 1.1: without vaue transfer diagram.2: with vaue transfer, without a pay rise on transition diagram 1.1: without vaue transfer diagram 1.2: with vaue transfer od pension scheme pensionabe earnings * jy _. Pension new pensionscheme new pensionscheme 30, age -> pensionabe years from transfer Tota RP ') = 63,827 of which. 51,084 from the new scheme. 12,743 from the od scheme Tota RP "= 68,112 of which. 68,112 from the new scheme. O from the od sqjieme The forecast pension shortfa of 4,285 based on no vaue "transfer taking pace, is whoy offset by taking account of the extra backservice years when assessing the pension. 1) RP = retirement pension

12 The new and od pension schemes are identica, with 65 as the pensionabe age, an accumuation rate of 1.75% for a maximum 40 pensionabe years and an RP to DP 1 ) ratio of 100/70. The empoyee has resigned at the age of 35 and transferred immediatey to a new job and joined the pension scheme. Pensionabe earnings 2 ) at resignation were 30,000. Pension entitements at resignation amount to 5250 RP and 3675 DP (fied I in the diagram. Ony RP is entered there). The annua rate of indexation on these pension entitements is expected to average 3%. Additiona RP stemming from indexation is thus forecast to amount to 7493 at age 65 (fied II). If pensionabe earnings were expected to rise 4% on average, the resut stemming from the 10 pensionabe years up to age 35 woud be an RP amounting to 17.5% (1.75% x 10 pensionabe years) of 97,302 (pensionabe earnings at age 35 of 30,000 x ) = 17,028. Resignation from empoyment therefore eads to a forecast pension shortfa on retirement of 17, = 4285 (fied IV) On entry to the new pension scheme the prospective RP amounts to 52.5% (1.75% x 30) pensionabe years) of the appicabe pensionabe earnings of 30,000 = 15,750. The reated DP is 70% of that amount or 11,025. In this situation the RP entitement carried over on resignation and the prospective RP in the new scheme sti add up to 21,000 (= ,750) or 70% of pensionabe earnings and is thus unchanged by comparison with the situation previous to resignation. The DP entitement is simiary unchanged. Adding in the accrued pension entitement via vaue transfer produces no change in this situation. Expressing the back-service entitement as a cash vaue and then transating that vaue into pension entitement under the provisions of the new scheme eaves the pension rights as such intact. The pension schemes are identica. Thus the vaue transfer produces an additiona pension entitement under the new scheme of 5250 RP and 3675 DP. The RP stemming from the vaue transfer is equivaent to 10 additiona pensionabe years. A pensionabe year under the new scheme is equivaent to 1.75% of 30,000 = 525 RP. An amount of 5250 RP is avaiabe from the vaue transfer, or in terms of years: 52 50:525 = 10. These years thus count towards future pension accrua. Suppose that pensionabe earnings rise in the first year of the new job by 5% or 0.05 x30,000 = The RP then rises by 1.75% x (30 reguar + 10 extra pensionabe years) x 1500 = The RP is thus 15, = 22,500 or 70% van 31,500. The vaue transfer has thus had the effect that an entitement of 1.75% x 10 x 1500 = RP is sti aocated over the years spent with the previous empoyer. In this exampe a itte more than woud have resuted if no vaue transfer had taken pace. Pension entitements woud then subsequenty have been index-ined at a rate of 3%, which woud have produced an extra pension entitement of 3% of 5250 = RP. The same cacuation appies for DP, but then x 70%. 1 RP = retirement pension, DP = dependants pension 2 Pensionabe earnings is income taken account of for pension assessment. Often saary after deduction of an aowance for benefits under the state retirement pension scheme AOW.

13 Suppose the empoyee subsequenty stays in the same job and is awarded pay increases at an average rate of 4%, he or she woud eventuay receive the same amount as if they had remained with the previous empoyer. The pension gap occurring on switching jobs due to the ower prospective pension in the absence of a vaue transfer is then competey eiminated. However it is impossibe to know in advance whether a vaue transfer wi eventuay make anyone better off uness, as aready noted, the pension entitements stemming from the previous pension scheme were never adjusted in subsequent years, or if the person in question sti envisages further substantia career advancement in the new job with an equivaent pension scheme.

14 Exampe 2: transition to an identica pension scheme accompanied by a jump in saary The starting point here is the same as in exampe. The difference compared to exampe is that the empoyee has pensionabe earnings of 40,000 instead of 30,000 on entering the new scheme.. He or she has moved to a substantiay higher saary on switching to the new job. As a resut, the empoyee is aocated a higher pension per prospective pensionabe year under the new pension scheme, and consequenty a ower number of additiona pensionabe years stemming from the vaue transfer. diagram 2.1: without vaue transfer diagram 2.2: with vaue transfer, and a jump in saary on transition diagram 2.1 without vaue transfer diagram 2.2 with vaue transfer od pension scheme new pension scheme new pensionscheme pensionabe earnings age 27,5 L 35 «7.5 pensionabe years from vaue transfer 65 Tota RP = 80,854, of which - 68,111 from new scheme - 12,743 from od scheme Compared with fu fina pay the pension shortfa has risen as a resut of the saary increase. Tota RP = 85,139, of which - 85,139 from new scheme - O from od scheme The vaue transfer has competey offset the expected pension shortfa of 4,285 that woud occur if no vaue transfer takes pace (85,139 = 80,854+4,285).

15 The prospective RP at initia entry to the new pension scheme amounts to 1.75% x 30 pensionabe years x 40,000 = 21,000. The reated DP is 70% of that amount, or 14,700. The effect of the vaue transfer is an additiona entitement of 5250 RP and 3675 DP. These amounts coincide with the amounts in exampe 1 because the new pension scheme in exampe 2 is identica to that in exampe1. The overa prospective pension is thus 26,250 (= 21, ) RP and 18,375 (= 14, ) DP. The additiona pension entitement compared with exampe 1 here reates ony to the entitement stemming from the higher pensionabe earnings, that is in the case of RP 1.75% x 30 pensionabe years x (40,000 30,000 = 10,000) = 5250, and in the case of DP 70% of that amount, or The fact that these amounts coincide with the entitements stemming from the vaue transfer is ony a consequence of the choice of new pensionabe earnings. The RP stemming from the vaue transfer is now equivaent to 7.5 instead of 10 extra pensionabe years. A pensionabe year under the new scheme is equivaent to 1.75% of 40,000 = 700 RP. This resuts in an RP stemming from the vaue transfer of 5250 = 7.5 x 700. The higher amount in pensionabe earnings at entry thus produces a ower number of extra pensionabe years. Based on the saary increase the tota number of pensionabe years taken into account for the purposes of pension assessment now becomes = However the ower number of years has no disadvantageous effect on the subsequent accrua of the transferred pension. If the pensionabe earnings show the same average growth up to pensionabe age, the empoyee is aocated the same additiona pension over these 7.5 additiona pensionabe years as in exampe 1. In exampe1 an increase in pensionabe earnings in the initia year in the new pension scheme produced an additiona entitement over the 10 extra years amounting to RP. In this exampe a 5% increase in pensionabe earnings in absoute terms is equivaent to 5% of 40,000 = The additiona RP over the extra years then amounts to 1.75% x 7.5 pensionabe years x 2000 = The reason is that athough the number of extra years has been reduced the nomina pension entitement is unchanged. And an increase in pensionabe earnings of x% ony means that the pension entitement stemming from the vaue transfer aso rises by x% (at east in this exampe which is based on the new scheme being a fina pay scheme). And 5% of 5250 =

16 Exampe 3: transition from a fïna pay scheme to an (index-inked) average pay scheme with unchanged pensionabe earnings. This exampe is based on transition from a fïna pay scheme to an indexed average pay scheme. This ast scheme is in principe the same as a fïna pay scheme, but prospective pay increases work through to the pension over future years of participation unti pensionabe age. Pension entitements stemming from past years of participation in the scheme are adjusted on the basis of price or wages indices, conditiona on sufficient financia resources being avaiabe. The exampe is based on the assumption that the indexation system in the fïna pay scheme for pension entitements carried over after resignation and existing pension payments is identica to indexation poicy in the average pay scheme. This means in fact that back-service pension entitements have neither a beneficia nor an adverse effect. diagram 3.1: without vaue transfer diagram 3.2: with vaue transfer, without a pay rise on transition diagram 3.1 without vaue transfer diagram 3.2 with vaue transfer pensionabe earnings od pension scheme new pension scheme new pension scheme 30, pensionabe years from vaue transfer (but do no count under new scheme) Tota RP =56,876, of which. 44,133 from new scheme. 12,743 from od scheme Due to an indexation rate agging wage trends, transition to the index-ined average pay scheme in this exampe produces an additiona pension shortfa of 6,951. Tota RP = 56,876, of which. 56,876 from new scheme. O from od scheme Not different from situation without vaue transfer based on identica indexation criteria. If indexation in the new pension scheme had been based on (the individua's) pay trend then the end resut woud have been the same as in diagram 1.2.

17 Based on the cacuation in the exampe, resignation at age 35 resuts in an expected pension shortfa of 4285 over the past period of participation, that is to say, the difference between the pension that woud have been awarded over that period on grounds of the expected rate of pay increase (4%) exceeding the prospective indexation rate for the back-service entitement (3%). Transferring the back-service pension entitement nevertheess resuts in the same entitement under the new pension scheme (no change in pensionabe earnings) and thus to 10 additiona pensionabe years. However these years have no significance in an average pay scheme because pay increases then ony work through towards the future. The paid-up entitement of 5250 RP and 3675 DP stemming from the vaue transfer is adjusted annuay on the basis of the appicabe indexation system, thus in this case by 3% per year. This means the expected pension shortfa stemming from the vaue transfer in this situation is not entirey or in other words is ony partiay eiminated. If the indexation rate in the new pension scheme is ower, the empoyee woud even be worse off as a resut of the vaue transfer. If on the same assumptions the saary and pensionabe earnings rise at the same rate in the new pension scheme as they did in the od, then the empoyee is by definition ess we-off because pension entitements accrue at a sower rate in an index-inked average pay scheme than in a fina pay scheme. In this exampe, the difference in pension for the initia year in the new scheme is aready 1% (= 4% - 3%) of the pension entitement accumuated over that year of 525 (=1.75% of 30,000), or 5.25.

18 Exampe 4: transition from an (index -inked) average pay scheme to a fïna pay scheme with unchanged pensionabe earnings In this exampe the od pension scheme is an index-ined accrua scheme. There is thus no question of a pension shortfa (that is to say on condition the pension entitements of active participants are index-inked on the same basis as those of eary eavers and pension recipients.). The empoyee's resignation does not ead to any pension shortfa stemming from previous years. The accrued entitement is index-inked after eaving the job in the same way as if the person in question had not changed jobs. Thus vaue transfer here does not serve to offset an expected pension shortfa, but to arrive at a higher pension by comparison with the situation before resignation. This is particuary significant in the case of transition to a fïna pay scheme if saary is expected to ri,se faster in the new job man the expected indexation rate in the od pension scheme, or in the case of transition to an index-inked average pay scheme, if the indexation system in the new scheme is more genereus than in the od. diagram 4. : without Vaue transfer diagram 4.2: with vaue transfer, without a pay rise on transition diagram 4.1 without vaue transfer diagram 4.2 with vaue transfer pensionabe earnings od pension scheme new pension scheme new pension scheme i 30, age v -o O pensionabe years from vaue transfer Tota RP = 63,827 of which. 51,084 from new scheme. 12,743 from od scheme There is no question of a pension shortfa on resignation because if the empoyee had not resigned no extra pension woud have been generaed from the period aready past The vaue transfer has been additionay beneficia to the person in this exampe because it has offset a non-existent pension shortfa

19 III. Some fina remarks The given exampes demonstrate the impact of vaue transfer in broad outine. What ceary emerges is that it is a compex subject matter, whereby it is not aways (or rather, often not) certain in advance whether vaue transfer actuay serves the envisaged purpose, notaby imitation or eimination of the pension shortfa that can occur over the previous period as a resut of switching jobs and thus aso pension schemes. The exampes show ceary that the type of new pension scheme chosen is a significant factor, as are the indexation poicy on pension entitements in the od scheme, the envisaged career in fina pay schemes and indexation poicy in index-inked average pay schemes. In practice there are moreover other factors at pay. What pension entitements are on offer under the new pension scheme, for instance? Or in other words, what happens with the transferred pension entitements, when they are eventuay transated to ine up with the provisions of the new pension scheme? Take for instance the situation that the od pension scheme provided for a dependants pension, whie the new one omits this, or provides for a risk-based dependants pension. Is it wise in that case to transpose the accrued entitement to dependants pension into retirement benefits? Another factor is pensionabe age. In the case of transition from a pension scheme based on a pensionabe age of 65 to one with a pensionabe age of 62, the transferred retirement pension wi be some 30% ower on the basis of an earier start to pension benefits. Is this what the empoyee wants? There are thus a myriad factors to be considered when deciding whether or not to request a vaue transfer. Adequate information is needed, preferaby backed up by internet appications. Umbrea bodes in the pensions industry have recenty decided to set up a good information system of this kind.

20 APPENDIX 2 Vaue transfer in the Netherands Diagrammatica overview: od pension scheme Nomina benefit at reresignation mutipied by the (statutory) benchmark singe premium per unit pension Actua vaue (AV) based on portion aready financed Transfer vaue (TV) TRANSFER Difference betw. TV&AV to debit/ credit of od empoyer/pension fund New pension scheme Transfer vaue (TV) divided by the (statutory) benchmark singe premium per unit pension; but now based on provisions under the new pensions scheme Difference between PC & TV to debit/credit of new empoyer/pension fund Paid-up benefit *) from transfer Purchase cost (PC) Extra pensionabe years (under fina pay scheme) *) When pension schemes are identica this entitement is equa to nomina benefit at resignation.

21 Diagrammatica overview: Vaue transfer procedure APPENDIX 3 Vaue transfer in the Netherands PARTICIPANT 1 Request for transfer: within 2 months after inception date of participation in a pension scheme *) PENSION ADMINISTR- ATOR NEW 2 Enquire vaue: within 1 month of receiving request for transfer PENSION ADMINISTR- ATOR OLD 4 Proposa: to entited party within 2 months of receipt of request Enquire vaue: within 2 months of receipt of request 3 Approva of proposa: within 2 months of receipt of proposa statement 5 Request cash transfer: immediatey 6 Statement of new entitements 8 Cash transfer: Within 3 months of receipt of request 7 *) extension to 6 months is proposed Statement of expired entitements 9

22 Address ist for the Labour Foundation and its member organisations Stichting van de Arbeid (Labour Foundation) Bezuidenhoutseweg 60 P.O.Box LK The Hague The Netherands T: F: E: Internet: Vereniging VNO-NCW (Corifederation of Netherands Industry and Empoyers). Bezuidenhoutseweg 12 P.O.Box AA The Hague The Netherands T: F: E: Internet: Koninkijke Vereniging MKB Nederand (Roya Dutch Association of Sma and Medium-Sized Enterprises) Brasserspein P.O.Box GB Deft The Netherands T: F: E: redactie@mkb.n Internet: Federatie Nederandse Vakbeweging FNV (Netherands Trade Union Confederation) Naritaweg 10 P.O.Box AL Amsterdam T: F: E: info@vc.fnv.n Internet: Christeijk Nationaa Vakverbond CNV (Confederation of Christian Trade Unions in the Netherands) Raveaan P.O.Box GL Utrecht T: F: E: cnvinfo@cnv.n Internet: MHP Vakcentrae voor middengroepen en hoger personee (Trade Union Federation for Intermediate and Higher Empoyees) Mutatuiaan 12 P.O.Box AN Cuemborg T: F: E: info@vc-mhp.n Internet: Land- en Tuinbouworganisatie Nederand LTO (Dutch Federation of Agricutura and Horticutura Organisations) Prinsevinkenpark 19 P.O.Box LT The Hague T: F: E: info@to.n Internet: