Converting pensions to the new system: what do you need to know?

• the proposal to allow pension plan members to vote on 
• pension conversion 
• whose pension can be converted 
• whether you need to consent to conversion 
• how conversion affects your pension 
• why the funding ratio and indexation are relevant

I already touched on this subject in my previous blog: Discussion about pension system raging again. This ignited a fresh political debate, focusing primarily on whether pension plan members had to give their consent to their pension being converted.

Preparations for transitioning to the new pension system are in full swing, yet the political parties NSC (New Social Contract) and BBB (Farmer-Citizen Movement) have submitted an interim proposal for a binding vote among pension plan members: a referendum. This would ask members whether they wish to convert their current pension to the new system. The other coalition parties are yet to provide their response. 

If the House of Representatives votes in favour, the proposal will then also have to reach a majority in the Senate. Although many issues surrounding the transition to the new pension system are still playing out behind the scenes, I will try to shed as much light as possible on the process in this blog.

Most people in employment have accrued pension entitlements at a pension fund. Of the total accrued pension capital of 1,800 billion euros, about 1,500 billion euros are held by pension funds and 300 billion euros by insurers and premium pension institutions (PPI). Only pension funds – representing 1,500 billion euros of capital – can convert pensions. This blog will therefore focus on them.

In 2024, employers and trade unions were obliged to produce a pension transition plan. This plan set out agreements about their new pension plan, including what happens to accrued pension entitlements (should they be converted to the new system or left in the old system?). 

Around 25 pension funds intended to transfer to the new system as early as 1 January 2025. As a result, they would need to convert accrued pension entitlements. In many cases, however, this proved to be easier on paper than in practice. In the end, three pension funds received approval from De Nederlandsche Bank (the Dutch central bank) to transfer to the new system on 1 January 2025. 

The other funds are expected to follow suit in 2026 or 2027. By 1 January 2028, all pension plans will have to comply with the new rules.

Pension payouts in the old system, which included options such as career average plans, were often perceived as stable. The concern about the new system is that these payouts are variable and therefore less predictable. Reality, however, is less black and white. There were no guarantees in the old system, as shown by years of uncertainty surrounding pension indexations (i.e. putting up pensions in line with rising prices) and pension cuts in some cases. 

Do you have to give your consent for your pension to be converted? No, you do not have an individual right of consent: your employer must reach agreements with your trade union. You therefore only have an indirect say in pension conversion. This could be in the form of member consultations or votes through your trade union.

Every pension fund currently has one large pension pot. The value of this pension pot is distributed across the body of members (active members, non-active members and retired members), and the total pension pot will be redistributed among them. Ultimately, each member will get their personal pension capital. 

In the event of conversion, the pension entitlements you have accrued in the old system are converted into personal pension capital. This amount is then transferred to the new pension plan. Active members’ pension capital grows on the basis of employer contributions or any contributions these members make themselves. The value of the fund’s pension pot can either increase or decrease in line with the profits and losses of a fund’s investment portfolio. 

Your pension fund must tell you in good time how much pension payout you can expect from your personal pension capital after it has been converted. Remember: this is a forecast, not a guarantee. The pension also tells members how their capital in the new pension system compares with the old system.

Pension payouts are generally expected to increase, although they will be less stable than before. If you are already receiving pension benefits, they will also rise and fall faster in line with financial market performance. 

Compensation will be required for people aged between approximately 45 and 55, as they may lose out from the transition to the new pension system. Pension funds should hopefully have enough extra assets to compensate this group, as compensation will need to be funded from the available pension pot.

Prompt and clear communications are a major part of the new legislation. It has been confirmed that three (smaller) pension funds transitioned to the new system as of 1 January 2025. This means that they should have notified their members prior to this date about the consequences of converting their pensions. 

The definition of ‘notification in good time’ has been argued as part of legal action brought by a retired member of the ‘Beroepspensioenfonds Loodsen’ (industrial pension fund for marine pilots). The judge was asked to consider whether the retired member had sufficient time to check whether the fund’s forecasts for their future pension payout were correct (final calculations are published only once the funding ratio is confirmed as at 31 December 2024) and to prepare for the consequences of those predictions for their retirement income. The retired member was informed in writing at the beginning of December that his pension payout would increase by 8% on 1 January 2025, based on the provisional calculation. 

The judge ruled that while the retired member was given a short space of time to consider the forecasts, postponing conversion would take up an unduly large amount of time and be at the expense of the fund’s other members. The member therefore lost his legal action. The fund will share its final calculations with this member and other members once it has confirmed its funding ratio as at 31 December 2024.

A pension fund’s financial situation plays an important role in pension conversions. In the current pension system, this situation is shown by the ‘funding ratio’: the ratio between the pension fund’s liquid assets and its obligations toward its members. The funding ratio can rise or fall depending on factors such as interest rates and the performance of economic markets at the time a pension is converted. 

Pension funds can smoothly transition to the new system by maintaining stable funding ratios over the coming years, without any sudden drops before conversion.

Most pension funds will only convert pensions in 2026 or 2027. Until that time, they are tied to the current system and the constraints of the funding ratio. Each year, pension funds determine whether they are able to index pensions. 

Pension indexation puts pressure on the funding ratio. While some pension funds will award indexation where possible, others prefer to maintain a higher funding ratio and use it to later compensate members who lose out due to pension conversion, or as a buffer to offset disappointing investment results in the future. 

Pension fund management boards are tasked with balancing the interests of all stakeholders, looking at short-term, medium-term and long-term effects. The board must determine how the percentage of the funding ratio above 100% should be spent: on indexing pensions, transitioning to the new system, compensating middle-aged members, maintaining a buffer to absorb disappointing results or raising all members’ pension entitlements.

The three pension funds mentioned have paved the way for others to transition to the new pension system. We have learned that a pension fund’s financial health, measured by its funding ratio, is key to pension conversion. The other funds that will switch to the new system in the future may have a longer period within which to notify their members in good time. With the process now in full swing, we will be closely monitoring developments at other pension funds. 

If you have questions about your pension, make an appointment with a Preferred Banking adviser to gain insight into your financial future. 

You can also read all our other articles about money for later.