Good day retirement day?

Text of Frank Kunneman’s speech during the second Fatum Pension Seminar, which was held in Sint Maarten on 5 November 2008.

Good day retirement day?

According to the figures of the CBS general Old Age Allowance (AOV) in St. Maarten amounts to ANG 674,- per person per month. With this amount it is almost impossible to make ends meet. Besides, it is even questionable to what extent the community can continue to pay the AOV.  Everyone gets older. There are less and less younger people to pay for the AOV.

In earlier days the elderly were sustained by their family. This natural old-age provision is slowly disappearing in St. Maarten. In many other places in the world, such as Holland, this already disappeared long ago. Families become smaller, there is a lot of emigration and the younger ones who stay do not feel like taking care for parents any longer. Therefore, it becomes more and more important to have a good pension.

In this presentation I will first discuss – in general – the contractual relationship between the three parties involved in a pension agreement. After that, I will go into some specific cases, such as bankruptcy, a change of job, and pension after a divorce. 

An enterprise can establish a pension provision for its employees in two ways. The pension money can be transferred to a foundation under own management (the so-called “ondernemingspensioenfonds”). The enterprise can also enter into an agreement with a professional (pension) insurer, who takes care of the further specifics and formalities. In this presentation I will not elaborate on the particulars of the “ondernemingspensioenfonds”.

A pension provision with a pension insurer is embodied in an agreement between three parties. In each of the three relationships there are mutually different rights and obligations. Broadly speaking this implies the following. The employer binds himself to pay a premium to the insurer. Generally, the employee does so as well. The insurer should manage the received funds in such a way that the employee, when reaching the pension age, will have a pension that renders him the same buying power as stipulated in the agreement.

The pension agreements with pension insurers have changed a lot during the past years. As a result of the population becoming older, as mentioned before, and the economic depression that in the meantime has started to set in, pension agreements are scrutinized better and better by both the employer and the insurer. Professor Lans Bovenberg points out a trend from a generally formulated pension agreement to agreements that usually explicitly foresee and provide for each situation. Nowadays more is recorded and less is promised.

Here the term pension contract is current, but legally not completely correct. From a legal point of view, different agreements are concluded between each of the three contracting parties. I will shortly discuss these.   
Employer and employee have an employment agreement. In many cases this agreement includes a pension promise in the secondary employment conditions. Under Dutch pension law such a promise is, under certain conditions, enforceable by the employee (against the employer). In the Netherlands Antilles it is not. According to reports one does intend to introduce a similar provision here as well.

In order to comply with his obligations arising from the employment agreement the employer will have to conclude an agreement with a pension executor. This is the second agreement in the three party relationship. This agreement is called the execution agreement (uitvoeringsovereenkomst) and contains the pension conditions.
From the execution agreement an independent relationship arises between the pension executor and the participant/employee. One could say that this is the third contractual relationship. In The Netherlands it is generally assumed that this relationship arises from a third party provision. Based on this provision the participant/employee can, from a certain age, independently claim the allowance that was agreed upon.

What happens in a bankruptcy?

Financially we are living in rough weather. Everywhere in the world banks and financial funds are under pressure. Does this have consequences for those who have pension rights, for instance in case of a bankruptcy? And what happens when the employer goes bankrupt? Do you lose your pension? That depends.
In case of a bankruptcy the picture of the pension, or the pension provision, changes dramatically.
In a bankruptcy three situations may occur:

1) the enterprise (employer) goes bankrupt;
2) the participant (employee) goes bankrupt;
3) the pension insurer or the pension fund goes bankrupt.

When the enterprise goes bankrupt, in most cases the employee is on the street. That is terrible, but in general his built-up pension is not at risk. The balance standing in his favour is placed with another company, the pension insurer. That company manages the deposited amounts for him and will pay out when the participant reaches the retirement age. The bankruptcy of the enterprise, the employer, does not affect that. What does occur is a pension breach. l will revert to this a little later.

When the participant goes bankrupt, the receiver in his bankruptcy can, in principle, buy off the deposited pension amounts. So in that case you lose your pension rights, unless a buy-off by the receiver is prohibited in the pension regulations.

In the Netherlands Antilles there is a draft ready for the introduction of a new insurance law. Part of this project of law is a better protection of the income (pension, life insurance) of the private person. In draft-article 18a of the Bankruptcy Order (Fb) it is prohibited for the receiver in bankruptcy to “buy out” the insurance if this adversely affects the insured or beneficiary to an unreasonable extent.

According to the project of law it is a question of adversely affecting to an unreasonable extent when the provision is, or will in the future become, the only source of income. The purpose of this law is also to leave people with some income at least. Here it is also a matter of letting part of the money fall into the estate, as long as the bankrupt can continue to live a life worthy of human beings.

Under present Netherlands Antilles law the rule is somewhat ambiguous. Article 475 Netherlands Antilles Code of Civil Procedure grants a general authority for attachment of claims that arise from a legal relationship which already existed at the time of the attachment. This may include a pension. The protection of the income will then depend on the judge-commissary, pursuant to article 18 paragraph 2 Bankruptcy Order.

In case the pension insurer or the pension fund goes bankrupt, theoretically the consequences for the insured are fatal: most probably he will have lost his full pension or part thereof, so he will receive little or no pension. However, this is a very theoretical case, especially since the legislator in the Netherlands Antilles (and in virtually all other countries) has placed insurers and pension funds under supervision of the Central Bank. The Central Bank shows all possible diligence in guarding that, in principle, the ratios of the pension insurers are such that they will be able to comply with their obligations. This does not take away the fact that in times of great economic decline and a dramatic decrease of share prices, as for instance is the case in the entire world at this moment, the value of the pensions could certainly be put under pressure.

What happens when you change jobs?   

Everywhere in the world, also in St. Maarten, there is an increasing working mobility. Till recently an employee stayed with the same employer his entire working life. Nowadays “job hopping” has become common practice. The question is how this influences the building up of the pension.

The reply is: very badly.

A pension breach prejudices the participant in different ways. The postponed pension with the employer who is left by the employee, is calculated over the employee’s salary at his departure. With an end-salary system future salary increases then only affect part of the pension. Consequently, the ultimate pension comes out much lower. In addition, in many pension arrangements the postponed pension does not have a fixed value. Remaining inactive in a pension fund also makes it difficult for an average employee to oversee the value of his total pension provision. Due to these three factors, which force down values, changing jobs in St. Maarten in general is bad for your pension. The Bank of the Netherlands Antilles acknowledges this problem and has, already in June 2006, plead for a change of the law on this issue.

In The Netherlands one did already find a legal solution for this problem. There is a law on value transfer and there are guidelines concerning the indexation of “old” rights.

It is important that a clear legal regulation on this issue be introduced in the Netherlands Antilles. It is not fitting for today’s community that a change of jobs later ruins the employee financially. A pension buy-out (an indexed allowance based on an average life expectancy) at the time of termination of the employment should in most cases not be possible anymore. It is my understanding that such a regulation is being worked on. The object of the committee drafting the law is to better protect the employee, and at the same time give him more freedom of choice. This way a change of jobs will not be that expensive any longer.

Pension after divorce

In general a divorce brings about many problems. Both emotional problems and financial problems. The regulation on pension after divorce is no exception to this. The important question is: In the case of a divorce, does the divorced partner (in most cases the woman) of the person who paid the pension premiums (in most cases the man) also has a right to part of the pension allowance at the time of division of the estate, whether immediately or after reaching the retirement age? The answer to this question is affirmative: yes.

A married couple builds op a pension jointly. Even if only one of the partners works, the right to pension belongs to the joint estate. The ratio behind this is that the non-working partner makes it possible for the other one to work. So the provision is built up by both partners directly and indirectly; it is the result of a joint effort. In case of a divorce the fruits of that should be divided.

In The Netherlands this was determined for the first time by the Supreme Court in the judgment Boon/Van Loon, NJ 1982, 503. In this judgment the Supreme Court considers that certain highly personal rights belong to the joint estate, as long as such is not contradictory to the right.

At that time, the fact hat the Supreme Court “turned around” implied a small revolution in the law. In the meantime this interpretation is generally accepted. In The Netherlands the rule was even codified in the “wet verevening pensioenrechten bij scheiding” (effective from May 1, 1995). The general import is that built-up pension rights during the marriage belong to the estate and should be divided, provided this was a marriage without ante-nuptial conditions (on this issue). 

This interpretation was adopted and is generally accepted in the Netherlands Antilles and Aruba.

A short time ago, on August 20, 2008, the Joint Court of Justice of the Netherlands Antilles and Aruba (AR 72/06-H-353/07) rendered an important decision in a case between a man and a woman who were married in 1995 in community of property and divorced in 2005. So the marriage lasted for ten years. However, the couple had been legally separated since 1999, three and a half years after they were married. The man started to build up his pension since 1979, sixteen years before his marriage. He had already been married once before. That marriage had ended with the death of his wife. At the time of the divorce in 2005 his second wife claims an amount of ANG 75,000.--, being the cash value of half of the pension built up by the man between April 1, 1979 and July 27, 2005. The man asked the Court of Appeal not to include the pension in the division of the estate based on special circumstances, such as the short duration of the marriage. Alternatively the man requested the Court to award division of the pension calculated only with effect from 1995, when he married his second wife. However, the Court of Appeal found that there were no reasons when dividing the estate not to consider the built-up pension in the period prior to the second marriage. As a result, the man had to divide his pension over the entire period in which it was built up, including the period during which he was married to his first wife.

Finally, a single word about the so-called “pension equalization”. In general, the man has a pension claim based on his life, whereas the woman has a claim to a widows pension, which depends on her surviving the man. The value of these two pensions generally differs rather widely. In the Netherlands Antilles, according to the Curacao-based civil notary Burgers, this difference in value is being undone by an objectionable method of adjustment of the difference in value.
An adjustment can thereby occur in two manners, both of which, however, have great disadvantages. When it is a question of more marriages or a legal separation (like in the example I just gave) the settlement becomes even more complicated (or more unjust).

In The Netherlands, in reaction to this, the system of pension equalization was created. Through article 1:94 Civil Code the pension rights do not belong to the estate, but there is a supplementary law which grants both parties an independent right against the pension executioner. Such a system would also be preferable in St. Maarten. Perhaps the retirement day will then become a good day and it will not be “good day retirement day”!