The Dutch pension system is considered to be among the best in the world, but many pension funds have not performed well in recent years. Find out about how you build up pensions in the Netherlands, the Dutch retirement age, types of pension plans, and risks to be aware of when planning your retirement.
The Dutch pension system has three pillars: state benefits (AOW), work-related benefits, and additional savings.
The first pillar consists of state benefits, frequently referred to as AOW (Algemene Ouderdomswet) pension. It is organized as a pay-as-you-go system, which means that the benefits of current retirees are paid by contributions from today's workforce. The state pension provides a basic income that is linked to the minimum wage. Retirees living together with a partner each receive up to 50% of the minimum wage. Pensioners living alone receive up to 70% of the minimum wage.
The second pillar are workplace plans that are offered by most, but not all, employers. Workplace pension plans are managed by a pension fund, insurance company or premium pension institution. Workplace pensions are capital funded, meaning that the pensions are financed from the employer's and employee's contributions and from investment returns. There are various forms of work-related pension schemes in the Netherlands, including defined benefit and defined contribution plans. Retirement income from work-related plans helps replace income from wages to maintain the standard of living.
The third pillar are additional savings and pension products, such as savings accounts and investment portfolios you set up on your own. It is managed individually to supplement retirement income, sometimes taking advantage of tax benefits. Tax benefits are mostly targeted towards people that are self-employed or employees without a workplace pension plan offered by their employer.
In most cases, everybody who lives or works in the Netherlands participates in the state pension scheme. State benefits are not tied to your work and people who do not work can also accrue state pension rights. Contributions are mandatory for Dutch residents, including both employed and self-employed workers. In order to be eligible for a Dutch pension, you need to contribute to the AOW scheme for at least one year. You can find more information about the website of the SVB (Sociale Verzekeringsbank).
You accrue work-related benefits when working for an employer that offers a workplace pension plan. Workplace pension plans are very common in the Netherlands. According to the Dutch Central Bank, about 80% of the working population participates in a workplace pension plan.
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The retirement age in the Netherlands is currently 66 and four months. It is set to gradually increase to 67 until 2025. After that the official retirement age is linked to future life expectancy in the Netherlands. If people are expected to live longer, the retirement age will increase further.
“The retirement age in the Netherlands is set to gradually increase to 67 until 2025. After 2025 it is linked to future life expectancy.”
The day you will actually receive your AOW pension depends on your date of birth. Your actual retirement date will be known five years prior to your retirement.
Workplace pensions are often calculated using a different retirement date. Currently, most pension providers calculate your pension using 68 as your retirement age (“pensioenrekenleeftijd”). It is possible to choose to retire earlier, for example, at the same time you will start receiving your AOW pension. However, your workplace pension will be reduced in this case.
The amount of state benefits you will receive depends on the pension rights you have accrued during your life in the Netherlands. You accrue two percent of the full state pension for each year that you participate in the Dutch state benefit scheme in the 50 years prior to your retirement.
The full state pension is reached if you participate for 50 years. As of January 2021, the full AOW amounts per month including holiday allowance are €1339.86 if you are a single living alone, and €935.04 if your are living together with a partner.
As a member of a workplace pension plan, you and your employer both contribute a share of your gross income to the plan every month. The employee and employer contributions are often agreed in collective labor agreements (CAO) for a particular industry or company. As an employee you typically have to participate in the workplace pension plan offered by your employer; you cannot choose your pension provider.
Pension funds invest the contributions in financial markets. The realized investment returns together with the contributions fund the pensions of plan members. The amount of pension you accrue depends on the type of pension plan.
There are different types of pension schemes with very different characteristics:
Hybrid forms, such as collective defined-contribution (CDC)
The majority of pension plans in the Netherlands are defined-benefit (DB) schemes. In defined-benefit plans, the amount of pension you build up depends on your salary. In almost all modern plans, you accrue pension equal to a certain percentage of your salary.
Defined-benefit pensions are not subject to market fluctuations. As a plan holder you do not invest yourself, buy your DB pension provider collectively invests the contributions of all plan members. It is the responsibility of the pension fund to earn sufficient returns such that the pension promises can be kept. Each year, most pension funds target to increase pension entitlements with inflation to maintain the purchasing power of the pension rights of plan holders.
However, if a pension fund does not perform well and pension entitlements of all members exceed the available assets, the fund will not be able to keep up with inflation such that the purchasing power of your pension declines. If the financial situation of the pension fund is particularly bad, pension funds may even have to cut pensions.
Defined-contribution (DC) pension plans differ from DB plans in many dimensions. For defined-contribution plans the pension accrual is not fixed. The amount of pension you will receive depends on the total amount of contributions paid in and the return earned on these contributions in financial markets.
When you retire, the funds you have built up will be converted into regular pension payments to you. The conversion rate depends on interest rates when you retire. The higher interest rates, the larger your pension is likely to be.
In a DC pension plan, the plan holder has more control how the contributions are invested. Most pension providers offer different investment choices with different risk and return characteristics. The value of DC pensions fluctuates more over time, as the plan holder bears both investment risk and the interest-rate risk.
In recent years, some pension providers have chosen a hybrid form called collective defined contribution (CDC) schemes. For these plans, the accrual is similar to DB plans, and contributions are invested collectively. If contributions and returns are not sufficient to cover pension payments later, the pension benefit will be lower.
Many defined benefit pension funds, including the largest, are not in good financial position. According to the Dutch Central Bank (DNB) the average funding ratio was only 95.3%, meaning that the average fund had higher pension liabilities than assets available to pay these pensions.
Due to low investment returns pension funds were not able to increase pensions with inflation over the last decade and a number of funds even had to cut pensions. Despite these measures, funding ratios of the majority of funds are still so low that indexation with inflation is unlikely in the coming years and the risk of further pension cuts is real. You can read more details about this topic in our blog post on indexation.
The third pillar consists of additional savings to supplement the pension income from state benefits and workplace pensions. This pillar is particularly important if you are self-employed or your employer does not offer a workplace pension. In these cases, there are tax advantages for certain savings products to help you save for your retirement.
Even if you have a workplace pension, the reduced purchasing power of pensions due to poorly performing pension funds can make additional savings necessary to maintain your standard of living in retirement.
If you would like to know more about your financial future, we offer a personalized Dutch pension report that presents all relevant information about your pension plans, the financial situation of your pension providers, the risk of pension cuts, and much more.