Government early retirement plans cause controversy

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In summer 2004, the Dutch government announced plans to phase out tax incentives for early retirement and introduce instead a 'life-span leave arrangement', enabling employees to accumulate a proportion of their pay to finance long-term leave for a variety of purposes (eg care duties, training or retiring earlier). Despite a critical response from trade unions, employers and occupational pension funds, the government appears set on pushing through its key proposals.

In autumn 2003, as part of an agreement that included a pay freeze for 2004-5 (NL0310103F), the Dutch government and social partners agreed to talks over the former's proposals for new arrangements for early retirement and a 'life-span leave regulation', enabling workers greater scope to save and manage periods of time off over their careers (NL0304103F). Consensus over such a scheme was regarded as a prerequisite for maintaining the pay freeze. However, after lengthy and difficult negotiations, no agreement was reached on the issue (NL0406102F) and talks broke down in June 2004 (NL0407101N).

The centre-right government subsequently announced its intention to phase out tax incentives related to early retirement. Instead of existing early retirement schemes, it wants to introduce a life-span leave arrangement, enabling employees to accumulate 12% of their gross annual wage towards long-term leave. This money could be used for various purposes, such as care duties, training or retiring earlier. At most, a total sum of 150% of the gross annual wage could be saved. The scheme could be implemented only through banks and insurance companies, and not pension funds.

At the end of August 2004, the government relaxed its position somewhat. Employees who are 57 or older on 1 January 2005 will retain their early-retirement tax advantages. Employees who are aged 50 or above on that date will be able to accumulate additional reserves for the future life-span leave arrangement.

Council of State issues critical recommendation

In August 2004, the highest advisory body in the Netherlands, the Council of State (Raad van State), issued a critical recommendation in response to the government’s plans. The Council is highly critical of the double taxation involved - as a consequence of government’s plans, both early retirement contributions and benefits would be taxed. The Council is also of the opinion that the proposals are inadequate in terms of their stated aim to increase labour market participation. The Council points out that labour market participation amongst older employees has been on the rise for years, referring in this context to a policy of 'opportunistic legislation'. Finally, the Council believes that government is encroaching on the right to collective bargaining enjoyed by employers and trade unions, referring to agreements reached between the social partners in the mid-1990s, which the legislative proposals apparently disregard. The agreements reached then were intended to transform existing pay-as-you-go early retirement schemes into a capital funding system in which employees accumulate funds to cover their own early retirement.

Opposition political parties, trade unions and the Dutch Federation of Small and Medium-sized Enterprises (Midden en Kleinbedrijf, MKB) have responded positively to the Council of State's recommendation. However, the government has announced its intention to submit its proposal to parliament despite the criticism.

Social partner reactions

The trade unions are highly critical of the government’s plans. The chair of the Christian Trade Union Federation (Christelijk Nationaal Vakverbond, CNV), Doekle Terpstra, called them 'hot air' and the vice-chair of the Dutch Trade Union Federation (Federatie Nederlandse Vakbeweging, FNV), Agnes Jongerius, believes that government is making a mess of matters. Both FNV and CNV state that life-span leave arrangements offer little, because most employees are not in a position to set aside 12% - let alone a higher percentage - of their annual wage each year.

Employers are critical too. The additional savings facilities towards life-span arrangements for employees aged between 50 and 57 will only be available to a limited group, and a spokesperson for the Dutch General Employers Association (Algemene Werkgevers Vereniging Nederland, AWVN) foresees problems in terms of implementing the arrangements. The Confederation of Netherlands Industry and Employers (Vereniging van Nederlandse Ondernemingen-Nederlands Christelijk Werkgeversverbond, VNO-NCW) is pushing for the old system to continue applying to employees who have not yet reached the age of 57, though without suggesting a specific age limit. Others to react highly critically to the government's plans include the chair of the employers’ association for the metalworking sector, Arie Kraaijeveld, and Martin Pernis, chair of the board at Siemens Nederland, who said that 'the approach towards early retirement schemes must be more gradual and the transitional arrangement must be broader'.

Reaction from pension funds

Company and industry-wide occupational pension fund associations share the abovementioned critical views and highlight the fact that the government's scheme will force them drastically to change their administrative systems. Separate systems will have to be developed for different employee categories, as they fall under different tax regimes. Representatives of the pension fund organisations fear that costs will quickly mount to many millions of euros.

Employers and employees seek early retirement solutions

In the meantime, the social partners in various sectors are attempting to find a solution to the problems that have arisen. In the metalworking industry, for example, there are rumours that proposals exist for circumventing new tax obstacles by financing early retirement schemes using unused tax 'leeway' within normal old-age pension schemes. This option is also under consideration at the largest pension funds in the Netherlands, the General Civil Pension Fund (Algemeen Burgerlijk Pensioenfonds, ABP).

An alternative would be for the social partners to accept increased costs arising from the abolition of tax breaks for early retirement. Up until 2012, these would amount to around 2.9% of the annual wage in the metalworking industry. Employers and trade unions would as far as possible like to maintain the existing system of integrated retirement and early retirement schemes in the metalworking industry. The ensuing costs could be carried (partially) by the abolition of employee savings schemes.

Impact on collective bargaining

The government's measures will also affect 'normal' collective bargaining. On 8 September 2004, consultations over a new collective agreement for the metalworking and electrical engineering industry were postponed until further notice, because it is not yet clear how the government's plans will work out (not only affecting early retirement, but also disability insurance). The negotiators also wanted to give the industry-wide pension fund a chance to asses the consequences of the government’s policy changes.

Free access to early retirement reserves?

On 7 September 2004, the government announced its intention to submit a legislative proposal that would provide employees with an opportunity to convert their early retirement rights. This is not possible based on current legislation. In total, this relates to an amount of some EUR 50 billion. The government does not intend to award such a right to individual employees: it would be for occupational pension fund boards - comprising both employer and employee representatives - to decide whether or not to make the contributions available to employees for other uses.

The government also intends to offer employees an opportunity to divert their early retirement rights to their normal retirement schemes.

Commentary

The current centre-right government is maintaining course and has displayed no intention of adjusting its policies based on critical responses (NL0409102N). Such criticism is not limited - for example, a recent survey indicated that 70% of the Dutch population rejects the proposal concerning early retirement.

Aside from cost-cutting and stimulating labour participation, the government appears to be set on replacing the system based on collective agreements with a system within which individual employees must bear responsibility for protecting their own earnings and old age provisions. This objective would go some of the way towards explaining the government’s arguably somewhat nonchalant response to the criticism expressed by the social partners. (Robbert van het Kaar, HSI)

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