The Dutch retirement income system received a score of 83.5 on the 2021 Mercer CFA Institute Global Pension Index, earning it a grade of A and deeming it a first class and robust retirement income system that delivers good benefits, is sustainable, and has a high level of integrity. It is based on three classifications: the State Pension (AOW) at the national level, collective pension plans at the occupational level, and private products at the individual level.
National Level
See ‘Current Issues’ section below for the latest reform proposals, some of which took were effective beginning January 2022.
The Algemene Ouderdoms Wet (AOW) Savings Fund is a compulsory pay-as-you-go system and is financed by payroll tax revenues. The AOW covers residents and people working in the Netherlands. Participants contribute 17.9% of their income. The AOW pension age will remain 66 and 4 months from until 2021 and will rise gradually to age 67 from 2022 to 2024. The state pension is guaranteed to rise with inflation until 2028. Only those who have lived in the Netherlands for 50 years preceding the normal retirement age are eligible to receive the full old-age pension. A partial pension is available for workers who don’t continuously live or work in the Netherlands for 50 years.
The retirement benefit is linked to statutory minimum wage. Couples also each receive 50% of the minimum wage while singles receive 70%. For every year one has not lived in the Netherlands and every year one has not worked before the retirement age, the pension benefit is deducted by 2%. This benefit is available when a person reaches 66 years old (gradually rising to 67 and three months by 2022), so early retirement must be funded through personal savings. Each additional early retirement year will reduce an individual’s benefit by 6.5%. Each year of deferred retirement will increase an individual’s benefit by 6.5%. In an effort to encourage people to work longer, the government is also offering a mobility bonus to employers for employing elderly workers.
Occupational Level
Collective pensions make up another level of the retirement system. There are three types of plans:
(1) Industry-wide funds are available to workers in a particular industry and are portable within an industry (i.e., construction or hotel and catering sector).
(2) Employer funds are provided voluntarily by an individual company to its workers (i.e., Royal Dutch-Shell Pension Fund).
(3) Independent professional funds are set up voluntarily by individual professionals (i.e., dentists).
Each fund is created by or for the respective category of workers — for example, teachers or a company for its workers — and managed by an independent organization that is formed separately from the company; this allows the plan’s protection should the company fail. Characteristics and funding of each plan are different depending on a fund’s board of trustees. These are quasi-mandatory plans because once a group (or company) decides to provide a pension plan, the entire sector or profession is required to participate. Eighty percent of occupational-level pensions are mandatory sector-wide pension funds. Employees can opt out of a sector-wide pension if their company establishes a company pension plan that provides at least comparable benefits.
Most occupational pensions are defined benefit (DB), although defined contribution (DC) and hybrid schemes are growing in popularity. For DC plans, employers make about two-thirds of the overall contribution and employees the remaining one-third. For DB plans, employees pay a percentage of their salaries (usually 4 to 8%), and the employer contributes as well.
Although there is no statutory obligation for an employer to offer a pension, more than 95% of employees are covered by one. As of January 1, 2018, the target retirement age (TRA) for occupational retirement plans in the Netherlands increased from 67 to 68, triggered automatically by an increase in the average life expectancy.
Individual Level
Lastly, individuals have access to a variety of private retirement income products. These include many accounts and savings products that enjoy high tax subsidies if the combined value of all pension benefits does not guarantee a replacement rate of 70%. Individual pensions can include annuities, endowments, life insurance, and fiscal old-age reserves for entrepreneurs.
Self-employed people are not linked to an employer and cannot participate in a supplementary pension scheme. In many cases, they must ensure that their AOW state pensions are supplemented by individual pension provisions. Self-employed people can also add a percentage of their company’s profits to the special tax allowance on an annual basis. The tax authorities will take that amount into account in the tax return and tax payment over that amount will be deferred.
Summary Sources
Dutch Ministry of Social Affairs and Employment. “The old age pension system in the Netherlands.” Accessed 01/21/2021.
Government of the Netherlands. “Q+A Supplementary Pensions.” Updated 12/22/2011. Accessed 01/21/2021.
H. Smorenberg. “The Stress Behind the Dykes: Debating the Next Generation of Retirement Policy Reforms in the Netherlands.” Georgetown University Center for Retirement Initiatives. September 2018. Accessed 01/21/2021.
Social Security Administration. “International Update, July 2019.” July 2019. Accessed 01/21/2021.
Social Security Administration. “Social Security Programs throughout the World: Europe, 2018 (Netherlands).” September 2018. Accessed 01/21/2021.
SVB. “AOW Home.” Accessed 01/21/2021.
Current Issues
Reforming the pension system has been a topic of constant debate in the Netherlands in recent years. In June 2020, the government published a proposed outline of reforms. Then, in January 2021, the government released a pensions reform bill, but after receiving criticism for some of the bill’s provisions, they postponed their initial timeline of reform roll-out. In March 2022, the government finally introduced the reform bill in the Dutch House of Representatives, and the bill needs to pass both houses, but it is expected to do so easily due to the long period of negotiations and consultations.
Changes to the national level system include the state national pension (AOW) retirement age gradually increasing to 67 between 2022 and 2024 from the current 66 years and four months based on longer life expectancy. In addition, there will no longer be a penalty associated with early retirement, allowing employees and employers to make agreements to retire up to three years early. These particular provisions were introduced in separate legislation, successfully passed with implementation starting January 2022.
Proposed changes to the occupational level system include no longer varying the value of the annual pension accrual based on a member’s age. The government also plans to slowly transition to a DC plan dominated landscape; all current DC plans will continue, and for those who only possess a DB plan, a new DC one will be set up, and DB plans will not be an option going forward. It is unclear what will happen with existing DB plans going forward. There will be flat contribution rates in both DC and DB plans.
Moreover, the government is planning to introduce a new ‘solidarity contribution scheme’, along with implementing reforms to the existing AOW and current collective occupational pensions. It is characterized by a collective investment policy for at least the excess returns for active, former, and future participants in the scheme. Accrual takes place by way of an individual pension capital that is combined with the benefits of collective risk-sharing (e.g. through spreading of financial ups and downs and a solidarity reserve). Current employees must be compensated separately by their employers for any decrease in their pension accrual values. This will increase employer costs, estimated at two- to three- times the current annual pension contribution. To offset this cost; suggestions for financing this transition include a temporary increase in contributions, temporary financial buffers, a lump sum from the employer in the solidarity reserve, etc.
In addition, a new type of pension design will be introduced for non-insured occupational pension plans, which will not offer benefit guarantees nor require funding buffers. Under these new designs, pension benefits will increase immediately if the year-end funding coverage ratio is above 100% and decrease if ratio falls below 100%.
Due to the delay in introducing the legislation, Minister of Social Affairs and Employment Wouter Koolmees announced that the reforms’ implementation date would be pushed back by a year to January 1, 2023; this will shift the transition period to end January 1, 2027. The government’s shift from DB plans to DC plans, including collective DC plans, will mark a big departure from the current system and require vast technological and administrative changes.
Summary Sources
Boelhouwer, Johanne. “Major reform of the Dutch Pension system.” JDSUPRA. April 5, 2022. Accessed 04/06/2022.
Eikelboom, Willem and Wichert Hoekert. “Netherlands: Draft pension legislation released for consultation.” December 30, 2020. Willis Towers Watson. Last Accessed 07/06/2021.
Eikelboom, Willem and Wichert Hoekert. “Netherlands: Pension reforms postponed for up to one year.” Willis Towers Watson. May 27, 2021. Last Accessed 07/06/2021.
Hintze, John. “The Changing Face of Dutch Pensions.” BNY Mellon. September 23, 2021. Accessed 04/06/2022.
Lockton Global Compliance, “Netherlands releases pension reform framework [Updated].” January 8, 2021. Accessed 04/04/2020.
Mercer. “Netherlands’ proposed pension reforms move forward.” August 24, 2020. Accessed 01/21/2020.
“The new pension reform.” De Nederlandsche Bank. Accessed 04/06/2022.
Source: Georgetown University’s Center for Retirement Initiatives
Last Updated 4/6/22