Recently, the General Old Age Insurance (in Dutch, Algemene Ouderdoms Verzekering or AOV) age on St. Maarten has been increased from 62 years of age to 65 years of age. This change has a significant impact on the business sector and work force in St. Maarten. This memorandum describes the history of the AOV, the changes made and the impact it will have on existing employment relationships and retirement plans.
The AOV adjustments
On May 20, 2020, the Government of Sint Maarten unconditionally agreed with the proposal of the Dutch Government to receive the second tranche liquidity support loan. One of the conditions set by the Dutch Government was that Sint Maarten must increase the pensionable age for civil servants from 62 to 65 years. In addition, the AOV age had to be increased to 65 as well. Also, the AOV benefits were increased with 11%. These adjustments have significant consequences for existing pension plans, future AOV benefits and cessantia provisions. This results in pitfalls the government as well as employers should avoid in order to prevent significant financial risks for employers as well as for employees.
AOV benefits
Persons who reside or work in Sint Maarten are insured under the AOV pension scheme. The AOV premiums are fully paid by the employees and employers. The AOV benefit that an insured is entitled to is built up with each year of insurance (the year the insured person resides or works in Sint Maarten). The AOV age was set at 60 years of age as of the early 1980’s. Before that time, it had been established at 62 years of age. As of January 1, 2016, until December 31, 2019, it had again been increased to 62 years of age, resulting in a benefit build-up of 2,13% of the maximum AOV pension for each year of Insurance. People would get a full AOV pension if they had been insured from the age of 15 years up to 62 years old. As per July 1, 2020[1] the pensionable age has increased to 65 so that as of January 1, 2020 the build-up period is 2% per year (insurance from 15 – 65 years of age). The increase of the pensionable age can be justified because of the worldwide increase of the life expectancy. The adjustments are also needed to increase the retirement benefits to a socially (more) accepted basic standard on Sint Maarten.
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[1] July 1, 2020 is the deadline set by the Netherlands
Increase of pensionable age for AOV
As a result of the increased AOV age, labor agreements (both individual and collective) need to be updated. The increase of the AOV age does not mean that the “retirement age” in labor agreements is also automatically increased. The increase in AOV age only means that beneficiaries will have to wait 3 years longer before they start receiving AOV benefits AND that they must pay premiums 3 years longer. This means that if labor agreements are not adjusted, the agreement will be terminated at the stated retirement age (in most cased 62 years of age). The retired employee will then have to wait 3 years before the AOV benefits kick in and will (still) have to pay AOV premiums over income earned during that same period.
Regulation Pensions
In addition to the AOV benefits which all residents are entitled to, employers and employees can agree a retirement plan. A retirement plan is an arrangement to provide employees with an (additional) income during retirement when they are no longer earning income from employment. Often retirement plans require both the employer and employee to contribute to a fund during their employment to receive defined benefits upon retirement. Since taxation on the premiums and investment income are deferred to the moment employees retire and start receiving the pension benefit, the Legislator established regulations that a retirement plan must adhere to. The Minister of Finance set conditions for acceptable retirement plans in the Ministerial Decree ‘Regulation Pensions’.
Socially accepted pension
The Regulation Pensions states that the retirement plan must provide for a “socially acceptable pension”. A socially acceptable pension amounts to maximum 70% of the pensionable wage. Based on the Ministerial Decree, the normal pensionable age is 60 (in accordance with the AOV age at the time) but that the retirement must start at, or between, the age of 55 (earliest) and 65 (latest). Furthermore, the AOV pension is included in the maximum amount of pension to be built-up.
Unfortunately, the Ministerial Decree was not amended in 2016 when the pensionable age for the AOV increased from 60 to 62 and again not in 2020 when the age increased to 65. For many employees the AOV benefit is an important (or only) element of his or her retirement plan. The lack of adjustments of the pensionable age of the Pension regulation means that the retirement age for AOV purposes has not been reconciling with the retirement age as mentioned in the Ministerial Decree since 2016, which can lead to significant undesirable consequences.
Financial risk employers and employees
Although the pensionable age is set on 60 in the Ministerial Decree, employers and employees should consider setting the pensionable age on 65 in accordance with the AOV. If employees retire at 60 years old, they must wait for their AOV pension payments until they turn 65 and consequently, they will receive only the employment part of their pension for 5 years. In addition, the retired (ex-)employee must still pay AOV premiums over his pension payments until the age of 65. The combination of a lower income (than anticipated when setting up the retirement plan) for 5 years and the withholding of AOV premiums on his pension could lead to significant financial difficulties.
The abovementioned pension gap is not only a financial risk for the employee. In a recent decision of the Court of First Instance an employer, which had retired an employee at 60 years of age in accordance with the Collective Labor Agreement, had to pay its ex-employee two years’ salary because the employee’s income decreased significantly more than anticipated as a result of the postponed AOV benefit and obligation to pay AOV premiums.
Flexibility retirement plan
The Ministerial Decree created the possibility to retire 5 years earlier or 5 years later than the AOV age of 60 years of age. This flexibility is important for employees in heavy occupations (and may need to retire sooner than other employees) and director-major shareholders who build up pension in their own company. Flexibility for these director-shareholders is necessary to guarantee the continuity of the business. Since these director-major shareholders are dependent on finding a party to take over the shares, they might be forced to work (mostly) longer than the pensionable age. However, if the pensionable age as stated in the Pension regulation is not increased with 5 years to 65, this flexibility is taken from them. The worldwide increase of life expectancy should not only increase the pensionable age, but it should also give employees the opportunity to work longer.
Tasks for the Government
Increase pensionable age
It is important that the Minister adjusts the Regulation Pensions to make sure that the pensionable age as stated in the Pension regulation reconciles with the age as mentioned in the AOV-Ordinance. Especially employees should be protected by the Ministerial Decree to prevent a possible pension gap of 2 or even 5 years if the employers do not adjust the pension regulations and collective agreements with their workers. The expectation is that the AOV retirement age (whether or not under pressure of the Netherlands) will increase further to 67. If that would be the case, and the Regulation Pensions is still not up to date, everyone in Sint Maarten will have a pension gap because it is not allowed to start your pension payments on 67 according to the Ministerial Decree. To prevent that you run into the same problems every time the AOV retirement age increases, it is advisable to refer to the AOV retirement age in the Ministerial Decree and add that the retirement must start between 5 years before or 5 years after the AOV retirement age.
Maximum 70% of the pensionable wage
With the increase of the pensionable age for civil servants in 2016, the maximum pension was (inadvertently?) increased from 70% to 74%. With this increase the pension regulation for civil servants was no longer a socially accepted pension in accordance with the Ministerial Decree Regulation Pensions. Based on the current Legislation a pension provision that is socially not accepted should be released, meaning that the full pension provision is taxable income for Wage Tax purposes. Of course, in practice this will not happen, but it is an interesting question if employees from the private sector could derive rights from the pension regulation for civil servants. After all, if 74% of the pensionable wage is socially acceptable for civil servants, why not for all other employees? The Minister would do well to provide clarity on this matter and adjust the Ministerial Decree accordingly.
Cessantia provision
Employees are entitled to a Cessantia payment when they lose their job through no fault of their own. In principle, if employees reach the pensionable age, they are entitled to cessantia too, unless they have pension accrued with the employer (at minimum equal to the AOV benefit). The employer can accrue a provision for cessantia payments they (might) have to pay in the future. In 1996, the Director of Taxes of the former Netherlands Antilles approved a fiscally acceptable calculation, considering a retirement age of 60 years old. In addition, the discount rate to be used was established at 6%, a reasonable rate at that time. This calculation is still used by companies as a safe harbor. To prevent discussions between employers and the Tax office about a fiscally acceptable provision it is important that the Director of Taxes issues an updated instruction, increasing the retirement age to 65 and reducing the discount rate to, for example, 3%.
Tasks for employers
Review and, if necessary, adjust your (collective) labor agreement(s) and your pension plan
That the Sint Maarten Legislation is not up to date yet does not mean that employers do not have the responsibility to prevent, or at least inform their employees, that employees might have to deal with a pension gap when they retire. Therefore, we advise all employers (who provide a pension plan to their employees or not), including director-major shareholders who build up pension in their own company, to review their retirement plan and (Collective) Labor Agreement as soon as possible. In addition, if your company accrued a cessantia provision, it is also important to let your accountant recalculate the amount of the provision.
For more information you can contact our office via telephone +1 721 542-2379 or e-mail info@sx.gt.com.