Employer, watch out for indexation charges after termination of a pension contract

Publication date: January 7, 2025

Terminating a pension contract (implementation agreement) for the execution of an average wage scheme may affect the resources available for indexation. For example, profit sharing or certain discounts may be impacted. If the employer, by terminating the implementation agreement, puts the employee in a worse position due to the loss of indexation potential, they may be held liable. This can lead to substantial additional pension contributions.

Conditional indexation

In many insured average wage schemes, a conditional indexation has been agreed that depends on the financial resources available. These resources are made available through surplus returns or, for instance, by depositing the scale discount into an indexation fund. In such cases, the employer is not required to pay single premiums for indexation.

Terminating an implementation agreement may result in fewer or no financial resources being available. This can happen if other costs are deducted from the surplus returns first or if there is no longer a scale discount in the case of a paid-up pension plan

Recent court case

In recent years, there have been regular proceedings about whether the employer owes compensation for the (permanent) absence of indexation after termination of the implementation agreement. In short, upon termination of the implementation agreement, employers may be required based on reasonableness, fairness, and good employment practices, to provide compensation for the loss of indexation prospects upon terminating the implementation agreement. A recurring criterion is whether the employer achieves cost savings and whether groups of participants are treated unevenly. In such cases, it is more likely that compensation will be deemed necessary.

Future Pensions Act

With the introduction of the Future Pensions Act, average wage schemes will no longer be allowed. For all existing average wage schemes, the implementation agreement will be terminated within three years. We recommend that employers, during this termination process, assess what indexation has been promised to participants, what resources are still available, and whether a gap arises for which the employer may be held accountable