What is the difference between collective and individual pension?

In the Netherlands, the pension system consists of three pillars. The 2nd pillar concerns the collective pension via the employer (a pension scheme that you arrange as an employer for your employees), while the 3rd pillar stands for individual supplementary pension (annuity/endowment) that employees build up themselves next to or in the absence of an employer scheme.

Below we discuss the main differences between these pillars in general terms – including fiscal treatment, flexibility, risks, employer's own discretion/contribution, and compulsory participation – who manages it, and the different costs for employers.

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2nd vs 3rd Pillar: Main Differences

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Fiscal Treatment:

With a classic 2nd pillar pension (employer's pension), the reversal rule applies: premium contributions are tax-free for the employee (exempted wage) and only the later payout is taxed. The premium is immediately deducted from the wages for wage tax and employee insurance contributions.

In the 3rd pillar (annuity/endowment), however, the contribution is not exempt on the payslip: every deposit via the employer is seen as taxable wage. The employee therefore first pays wage tax and social contributions on that amount (or the employer designates the amount as final levy wage), but can later reclaim the premium fiscally via income tax (declaration) provided there is sufficient annual scope.

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Flexibility and Voluntariness:

A 2nd pillar pension scheme is generally collective and compulsory for (all or certain groups of) employees within the organisation. As an employer – especially with an official pension scheme under the Pensions Act – you must allow all eligible employees to participate under equal conditions. The premium (your contribution and any employee contribution) is (usually) fixed according to the pension agreement and is not individually flexible or adjustable.

In the 3rd pillar, there is much more freedom of choice. The employee in principle decides for themselves whether they take out an annuity product and how much they contribute. Participation is voluntary and flexible: employees can choose whether or not (and with what premium amount) to use the annuity option.

There is also flexibility for you as an employer: you are not obliged to contribute, and if you do contribute, you can determine how much and whether you do so annually (for example, a fixed contribution, a match, or nothing).

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Fiscal Scope & Advantage:

Since the introduction of the Future Pensions Act (Wtp), the fiscal scope for pension accrual in the 2nd and 3rd pillars has been made equal. For both, a maximum contribution of 30% of the pension base (pension-yielding wage minus the State Pension (AOW) franchise) now applies.

In practice, the exact pension base still differs slightly. For annuity (3rd pillar), for example, income from private use of a car and certain other aspects also count as the base, but there is no (part-time) AOW franchise in the 3rd pillar. This means that the annuity is no longer fiscally disadvantaged compared to a 2nd pillar pension – both can now be built up in a fiscally friendly manner within comparable limits.

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Risk and Coverage:

In the 2nd pillar, the pension provisions are often broader than just old-age pension. Collective pension schemes via the employer usually also include survivor's pension (partner's pension) and occupational disability cover as part of the package. This means that in the event of the employee's death before pension date, there is a payout for the partner/children, and that in the event of occupational disability, premium exemption or an occupational disability pension sometimes applies.

In the 3rd pillar, however, the employee essentially only builds up their own pot for old age (annuity or bank savings balance). Insurance for mortality risk and occupational disability must possibly be arranged additionally by the individual. In many cases (with an annuity savings or investment account) this does go to surviving relatives in the 3rd pillar.

Regarding investment risk, under the new pension system (Wtp), the 2nd pillar is also often based on defined contribution, which means that the pension outcome depends on investments. However, solidarity or risk-sharing mechanisms (for example, sharing longevity risk within a fund) may still exist in collective schemes.

In the 3rd pillar, the individual participant bears the investment risk themselves. The final annuity payout depends on the individual contribution, investment return, and annuitisation at retirement.

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Employer's Role and Compulsory Participation:

A 2nd pillar pension requires active involvement from the employer. You conclude a pension agreement and often a contract with a pension provider (pension fund, insurer, or PPI) and ensure its implementation. The Pensions Act applies, which means that strict rules apply regarding communication, duty of care, and equal treatment, and that you usually have to engage a recognised pension advisor to set up a scheme.

In many sectors, there is also a compulsory industry-wide pension fund: if your company falls under a Collective Labour Agreement (CAO) or industry with such a compulsory fund, you must register your employees with the fund and remit contributions – in that case, you cannot choose a 3rd pillar solution as an alternative.

In the 3rd pillar, the employer's role is optional. Without a pension scheme, you are not obliged to do anything for the employees' pension (unless there is a CAO obligation). You can voluntarily choose to facilitate them, but the responsibility primarily lies with the employee themselves.

The Pensions Act does not apply to pure 3rd pillar products, so many legal obligations for the employer (duty to advise, employee participation, etc.) lapse. This lowers the threshold for you to offer something.

Note: if you are covered by a compulsory fund or already have a collective scheme, you cannot simply switch to only a 3rd pillar solution.

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Management and Implementation of the Scheme

Management of 2nd pillar schemes:

In the 2nd pillar, the pension assets are usually managed collectively by a pension provider. This can be an industry-wide pension fund or company pension fund (for compulsory or private pension funds), or an insurer/PPI that implements a group scheme. The employer concludes a contract with such a provider, but the management (investments, administration, payout provision) lies with that pension institution.

Employees have limited insight or influence on individual pots (especially in traditional average salary/final salary schemes, everything was communal; under the new Wtp, we are moving towards individually reserved assets, but with collective implementation). The employer has legal information obligations towards employees, but the day-to-day management lies with professional parties.

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Management of 3rd pillar schemes:

In the 3rd pillar, the management lies individually with the employee and the chosen provider. Employers may deposit into the annuity account (3rd pillar) and sponsor the costs.

Every employee has their own pension account or policy. The employee (as account holder or policyholder) determines, within the product, how the money is invested (for example, choice of profiles) and has individual insight into their balance. A pension account with Vive is managed by us. We, as asset managers, determine how the money is invested. The assets are therefore in the employee's name, and they retain them upon leaving employment.

You as an employer have no management role after any contribution or facilitation; at most, you arrange the periodic transfer of premiums and communicate with the provider for administrative matters.

Important to note: because a 3rd pillar product is legally a private agreement of the employee, it does not fall under the employer's pension scheme and therefore not under the strict Pensions Act rules. This significantly relieves your administrative burden. Employees are namely responsible for their own choices, and there is no compulsory co-determination via the Works Council (OR) regarding the content of the scheme (as may be required with a 2nd pillar pension).

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2nd vs 3rd Pillar: Costs for the Employer

Costs in the 2nd pillar:

With a collective pension scheme, the employer must take structural costs into account.

Firstly, there is the employer's premium: the employer often remits a fixed percentage of the salary per employee to the pension provider. This is directly an extra wage cost item per employee.

Secondly, there are the administration and implementation costs: pension providers calculate management costs, which are usually calculated in the premium in advance or deducted from the pension assets. Sometimes you as an employer also pay separate management fees (for example, €X per participant per year to the provider).

Thirdly, there are advisory and implementation costs at the start: an advisor can cost several thousands of euros to set up a plan; the provider may charge entry costs. Internal costs (HR doing administration, communication, etc.) also count. Sources show that the annual costs of a traditional pension scheme are relatively high compared to new alternatives.

Fourthly, there is something called the management of obligations: this is a “cost item” in a broad sense because one must invest money and time in compliance (e.g., keeping the pension regulations up-to-date according to the law).

In short, a 2nd pillar pension costs money, not only in the form of premiums but also in transaction costs and overhead.

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Costs in the 3rd pillar:

In a 3rd pillar set-up, the costs for you as an employer can be significantly lower and more manageable. For example, in the event that you as an employer choose not to give a direct premium contribution, but only facilitate the account, the costs are virtually nil. In that case, nothing extra is paid on top of the wages.

If you do decide to contribute, you have full control: you can determine and adjust the amount and frequency yourself. You could, for example, say: “I give every employee an extra €50 net per month for a pension in an annuity.” That €50 net costs you slightly more gross (depending on wage tax and employer contributions), but it is a fixed, bounded amount.

There is also no obligation to index or increase as employees get older (as with DB-schemes).

You can also link the contribution to profit or results (if things are going well, an extra deposit into everyone's annuity, if things are going badly, less). The administrative costs of transferring annuity premiums are low, especially if you have a contract with one provider who charges no costs for deposits. Generally, employer costs for the 3rd pillar are cited as lower than for the 2nd pillar, because no expensive advisory and implementation cost structure for a collective plan is needed.

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What Vive Offers

Vive is a complete platform for pension and asset accrual in the 3rd pillar, tailored to SMEs. With Vive, you as an employer help your team in an accessible way to build up assets via a personal pension or investment account. Companies that previously refrained from a collective pension scheme due to high costs or complex rules now have the chance to offer a good pension. 

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How does that work - employers?

As an employer, you sponsor a pension account with Vive. This means that you as the employer pay the subscription costs for the pension account and the onboarding. The employer chooses for whom they offer it. Additionally, you can choose to contribute with a fixed amount or a periodic contribution, starting at any desired level. 

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How does that work - employees?

For the employee, this means a pension account where investments are made with fiscal advantage. This creates a financial pot for later in an accessible way. They also receive a nice tax rebate each year from their contribution. 

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