The Future Pensions Act: more insight, more control, but also new challenges

The Dutch pension system is facing a major transformation with the arrival of the Future Pensions Act (Wet Toekomst Pensioen, WTP). This new system replaces the old collective model, which has become unsustainable due to demographic changes and a changing labour market. With the introduction of individual pension pots, employees gain more insight, control, and flexibility over their pension.

Although the WTP offers many advantages, the transition also raises questions. How does the new system work? What are the pitfalls? And what role do employers play in this? In this blog, we discuss the key changes, challenges, and opportunities that this legislation brings.

Why was change necessary?

The Dutch pension system was increasingly pressured by societal and economic changes. While the collective nature of the old system was effective for years, it proved to be less and less suited to modern reality. But what makes the old system unsustainable? Let's discuss three important factors.

Demographic changes

The Netherlands is ageing. The number of pensioners is growing while the working population is relatively shrinking. This creates an imbalance in the system, which is based on solidarity between generations. Younger generations pay premiums for the pensions of older people, but due to the growing ageing population, this model is becoming increasingly difficult to sustain. The pressure on the current working population is increasing, while they are uncertain about their own pension in the future.

Changing labour market

The labour market has changed drastically in recent decades. People no longer work for one employer their entire lives but regularly switch jobs or opt for flexible contracts, self-employment, or part-time work. However, the old pension system was designed for a time when employees had a fixed job and career. As a result, many people ended up with gaps in their pension accrual, which led to uncertainty and dissatisfaction.

Indexation problems and breach of trust

Another major problem was the lack of pension indexation. Due to economic headwinds, many pension funds were unable to adjust pensions to the rising cost of living for years. This led to tensions between younger and older generations:

• Older people expected an indexed pension that grew with inflation.
• Younger people wanted certainty that sufficient resources would remain in the future to receive a pension themselves, as young people pay for older people within a collective pension.

The result was a growing breach of trust between participants and the system. When promises are not kept due to financial shortfalls or political interference, trust is further eroded.

These structural problems made it clear that the pension system was no longer sustainable. There was a need for a system that is more flexible, better suited to a changing labour market, and offers more transparency. The Future Pensions Act should be the answer to these challenges.

What does the Future Pensions Act bring?

The Future Pensions Act (WTP) marks a fundamental transition in the Dutch pension system. The new system focuses on personal responsibility and transparency, aiming for a system that better meets the needs of modern employees. But what exactly is changing?

From collective to individual:The most noticeable change is the introduction of individual pension pots. Where premiums were previously collected in a collective pot, every employee now gets their own pot in which both deposited premiums and investment returns are visibly tracked. This offers employees more insight and control over their own pension accrual.

Progressive accrual:With the WTP, pension premiums are accrued in a new way. Younger employees build up more in the initial years of their careers because their premiums can generate returns for longer through investments. This is a better fit for a dynamic labour market where employees switch jobs more often.

More freedom of choice:Employees will have more options to adjust their pension accrual to personal wishes, such as taking their pension earlier or extra saving through the third pillar. This flexibility is particularly attractive for the self-employed and employees (with, for example, a variable income). You can, for example, wait until the end of the year, buy Christmas presents, prepare Christmas dinner, and then finally deposit the remaining money into your pension. 

Responsibility and transparency:The emphasis on transparency means that employees are better informed about their pension. At the same time, this brings new responsibilities: employees must become more actively involved in their pension choices and the impact thereof. For this reason, it is important that they are provided with the right knowledge – but also that they have clear insight into the growth of their pension assets (and unfortunately, collective pension funds are still largely a black hole). 

With these changes, the WTP aims to create a future-proof system that better suits a changing labour market and demographic developments.

The advantages and disadvantages of the WTP

The WTP introduces opportunities and challenges for employees, employers, and pension funds. The main advantages and disadvantages are set out below.

Advantages:

• More insight and control:For the first time, employees can see exactly how much they have saved and what income they can expect upon retirement. This increases their involvement and enables more targeted choices.
• Flexibility in accrual and withdrawal:The system offers room for personal adjustments, such as retiring earlier or extra saving. The progressive accrual also gives younger employees a flying start, allowing them to build a solid pension more quickly.
• Adaptation to a dynamic labour market:With individual pots and additional savings options, the system is better suited to flexible working forms, such as freelancing, part-time work, or setting up a company.

Disadvantages:

• Uncertainty due to "invaren" (conversion):The mandatory conversion of existing pension rights to the new system raises concerns, especially among older employees who fear a loss of value or less favourable conditions. It could be that their pot is smaller – due to, for example, lower contributions. However, a change in the pension scheme usually only affects the pension you accrue in the future. With conversion, the pensions you have already accrued are transferred to the new scheme. This means that both the old and new pensions remain together with the same pension provider.
• More responsibility for employees:The new system requires more financial knowledge and involvement from employees. Not everyone feels comfortable with this, which can lead to mistakes or uncertainty about the future. It is therefore important that knowledge is provided and that people are guided. 
• Dependence on investments:The focus on returns from investments increases the risks, especially in economically uncertain times. This can influence the stability of pension outcomes. But for many of us, we still have plenty of time until retirement. The longer you have, the less economic risks affect you. 
• Complex implementation:The transition to the WTP requires significant investments from employers and pension funds. This includes costs for system adjustments, communication, and employee guidance.

Although the WTP is a big step forward towards a future-proof pension system, important challenges remain. The success of this transition depends on how well employers, employees, and pension providers are able to adapt to the new rules and processes. Ultimately, the Act offers many opportunities, but only if the parties involved succeed in effectively tackling the challenges that come with it and maintaining the trust of participants.

A new pension landscape

The Future Pensions Act marks a historic change in the Dutch pension system. With more emphasis on individual responsibility, transparency, and flexibility, the new system offers employees and employers opportunities to better align pension accrual with personal and societal needs. At the same time, this transition brings challenges, such as uncertainty surrounding the "invaren" (conversion) of rights and increased complexity for all involved.

The success of this new pension landscape depends on clear communication, adequate support, and cooperation between employers, employees, and pension funds. Only by effectively addressing these aspects can the WTP grow into a future-proof system that inspires confidence and provides a solid foundation for the pensions of young and old.