Defined benefit pension – Average pay

In an average pay scheme, pension accumulation occurs for each year of service. The accrual in each particular year is linked to the salary earned in that year. There is no past-service benefits accrual should a salary increase. The yearly accrual equals a percentage of the pensionable base. In the Netherlands, the maximum percentage for tax purposes is 1.875% accrual per year as from 2015. The total accrual is the sum of the annual accrual and in most cases, this accrual is conditionally indexed.

Average pay systems are very common in compulsory industry-wide pension funds. The premium to be paid to the industry-wide pension fund is an equal percentage of the salary for each employee. This average premium is under enormous pressure due to longer life expectancy, aging of the workforce, low-interest rates and poor yields. Without further measures, the premium to be paid to pension funds (and insurance companies) for defined benefit schemes will increase sharply.

More and more pension funds are changing to hybrid pension schemes in which life expectancy and profit will influence the final height of the pension.