Job change or early retirement can lead to significant pension damage due to new pension legislation
Publication date: April 11, 2025
Termination of employment is commonplace. Normally, it is a no-brainer: end of employment, end of pension accrual, new round, new (pension) opportunities, or early retirement. Due to the Future of Pensions Act (“Wtp”), pension at the premature end of employment deserves much more attention than usual.
Obligatory flat premium is the reason
Under the Wtp, all pension schemes must be converted into so-called premium agreements. According to Article 17 of the Pension Act, there is also the requirement of an age-independent premium, which is limited by the 1964 Wage Tax Act to a maximum of 30% of the pension base. Due to this so-called flat premium, especially older employees can be at a disadvantage when changing jobs. This leads to lower work force mobility or damage if the employee is not aware of the future decline.
Missing compensation in the form of pension at pension funds
When accrued pensions are converted to the new system (the so-called “invaren”), there is the possibility that the fund will decide on pension compensation from the fund's assets. This pension compensation, intended for active participants, can be paid out in one lump sum or over a period of up to ten years. If an employee resigns or the employment is terminated by mutual consent, the employee can miss out on large amounts of pension compensation. The legislator intended that this employee would also receive pension compensation in their new employment, but in practice, this only happens if there is an industry-wide pension fund that also compensates new participants and the compensation has not already been awarded in one lump sum at the time of conversion.
Missing compensation in the form of salary
In the case of an insured arrangement with an insurance company or pension premium institution, there is a practical necessity to compensate employees if there is a decline in pension. Without compensation, the employee will normally not agree, and the employee's consent is basically required. This compensation, as theory and practice show, usually takes place in the form of a salary supplement for a considerable number of years as long as the employment continues. Compensation in the form of salary means that new employees are not eligible for this. Due to premature termination of employment, the employee is no longer eligible for compensation, neither with their old employer nor with their new employer.
Conclusion
An end of employment or job change is not without pension risk due to the Wtp. Because (pension) compensation due to the Wtp will also exist after January 1, 2028, this risk has not disappeared for the time being.
