Indexation policy

Checked on 27 May 2019

Making sure that your pension keeps its value

We seek to raise your pension annually

Philips Pensioenfonds wants to offer you a pension that retains its purchasing power in the long term, to make sure that it still buys you as much in the future as it does now. That is our ambition. To realise that ambition, we need to adjust your pension to reflect increases in prices (for retired members and non-contributory policyholders) and wage increases (for active members). This is called ‘indexation’.

Summary of recent indexation

How much has your pension increased through indexation in recent years?

Summary

In 2019, your pension has undergone a partial increase

The indexation rate is 75% of our ambition

The Board of Trustees of Philips Pensioenfonds passed a decision to index your pension at 1 April 2019, after the pension fund’s policy funding ratio rose to 119.8% in 2018. This funding ratio allows us to realise 75% of our indexation ambition. This means the following:

  • Retired members and non-contributory policyholders
    For retired members and non-contributory policyholders, our indexation ambition is the same as the rate for price inflation based on the derived consumer price index. Last year, that index rose by 1%, and current and non-contributory pensions went up by 0.75% at 1 April 2019.
  • Active members
    For active members who are accruing pension rights under the flex pension, our indexation ambition is to raise the accrued rights by the same rate as wage inflation. Last year that was 3%. At 1 April 2019, the accrued pension rights were raised by 2.25%.

Indexation policy: a quick introduction

This information explains under what circumstances your pension can be raised.

Indexation ambition

Money loses some of its value every year as prices rise. This means that the same amount of money buys you less than it did a year before. This is called ‘inflation’. As prices increase, Philips Pensioenfonds seeks to raise its pensions accordingly. For active members, the ambition is to raise the accrued pension rights every year by the same rate as wage inflation, expressed as the movement in the collective salary scale adjustments at Philips. This extends to Signify employees as well. As developments in recent years show, indexation cannot be granted automatically.

Find out more about the indexation ambition

Indexation table

The Philips Pensioenfonds indexation table shows precisely when we can grant you indexation. That question depends on the policy funding ratio, which reflects the pension fund’s financial health. If indexation is granted, that same funding ratio shows whether your pension can increase by the same rate as wages or prices. 

Find out more about the indexation table

Indexation for active members

For Philips and Signify employees currently accruing pension rights, the pension fund seeks to raise the accrued rights annually. These annual increases are important to ensure that your pension retains its value when you start drawing it.

Find out more about indexation for active members

Indexation for inactive members

If your employment ends or if you retire, Philips Pensioenfonds seeks to increase your pension annually to reflect price inflation, based on increases in the derived consumer price index published by Statistics Netherlands (CBS).

More about indexation for inactive member
Do you want to know more?

Questions and answers

  • Are the current and non-contributory pensions indexed in the same way as the accrued pension rights of members still actively accruing their pensions?

    The ambition of Philips Pensioenfonds is to raise current and non-contributory pensions annually by the same rate as price inflation, expressed in the movements in the derived consumer price index established by Statistics Netherlands (CBS). In 2018, that index rose by 1%.

    The ambition of Philips Pensioenfonds is to raise the accrued pension rights of employees still working for Philips and Signify annually by the same rate as wage inflation, expressed in the movements in the collective salary scale adjustments at Philips. Last year, that was 3%

    Whenever the Board of Trustees passes a decision to raise the accrued pension rights, for most members this takes effect on the same date every year: 1 April.

    In 2019, indexation was granted at different rates to retired members and non-contributory policyholders and to employees currently accruing pension rights. Current and non-contributory pensions were raised by 0.75%; price inflation was 1%. The accrued pension rights of employees currently working for Philips and Signify went up by 2.25%; wage inflation was 3%. In both situations, this represents 75% of the ambition.

  • Philips Pensioenfonds uses the ‘derived’ consumer price index: what does this mean?

    Every year, as prices increase, Philips Pensioenfonds seeks to raise its pensions accordingly. These increases are based on the ‘derived’ consumer price index published by Statistics Netherlands (CBS). That index does not make allowance for price increases that result from new product-specific tax rates. For example, last January’s increase in VAT is not included in the indexation rate at 1 April 2019. Philips Pensioenfonds is not alone in this: the derived price index is used by most pension funds, which would otherwise have to accommodate price increases resulting from government measures.

    However, the government has already made allowance for January’s VAT increase in the income tax system, by introducing changes to compensate for the increase in the lower VAT rate from 6% to 9% on 1 January 2019.

  • Why is the increase in the derived consumer price index so much less than the inflation rates reported in the media?

    Over the period from January 2018 to January 2019, movements in the derived consumer price index (‘derived CPI’) differed significantly from the movements in the ‘standard’ consumer price index (‘CPI’). That difference was caused by the increase in the VAT rate on 1 January 2019, from 6% to 9%. That higher VAT rate is reflected in the CPI, but not in the derived CPI. The inflation reported in the media is generally based on the ‘standard’ consumer price index, or CPI. Philips Pensioenfonds bases its indexation on the derived CPI (see the previous question for details).

    What is the difference between the derived CPI and the CPI?
    The CPI measures the average change in price of a standard package of goods and services used by households, including increases resulting from changes in product-linked taxes. The derived CPI does not make allowance for price increases that result from changes in product-specific taxes. One consequence is that the increase in the low VAT rate on 1 January 2019, from 6% to 9%, is not reflected in the derived CPI and as such is not included in the indexation at 1 April 2019. If that were the case, Philips Pensioenfonds would be forced to compensate price increases resulting from government measures. The overwhelming majority of pension funds prefer to use the derived CPI.

    Government measures
    The government has already made allowance for January’s VAT increase in the income tax system, by introducing changes to compensate for the increase in the lower VAT rate from 6% to 9% on 1 January 2019. This means that you now pay less tax on your overall pension income (including your state pension), as a result of the government’s efforts to preserve your purchasing power.

  • How much indexation has been forgone in total?

    No full indexation has been granted since 2011. The ambition of the Board of Trustees is to grant full indexation at the same rate as price inflation (for retired members) and at the same rate as wage inflation (for active members). A review of recent years shows that up to and including 2019 the total indexation that has been forgone compared with that ambition is:

    • 9.8% for retired members and non-contributory policyholders
    • 13.7% for current employees of Philips and Signify accruing pension rights under the flex pension (collective labour agreement and senior directors) plan
    • 15.6% for current employees of Philips and Signify accruing pension rights under the flex pension (executives) plan.
  • Is compensatory indexation possible?

    Yes, this is a possibility. Any decision to grant compensatory indexation is made by the Board of Trustees of Philips Pensioenfonds. If the policy funding ratio is higher than 123%, compensatory indexation may be granted. However, it may only be granted in small steps. Every year the pension fund may grant you additional indexation corresponding to 1/5 of the percentage points by which the policy funding ratio exceeds 123%. For example, if the policy funding ratio is 128%, you may be granted a maximum of 1% (= 1/5 x 5%) in compensatory indexation. If the total foregone indexation is 6.5%, and assuming that the policy funding ratio remains steady at 128%, it will take 6 1/2 years to make up the entire deficit. In other words, the policy funding ratio will need to be 128% for 6 1/2 years in order to compensate the entire deficit of 6.5%.

  • When is compensatory indexation possible?

    In recent years your pension has not risen at the same rate as the prices. The indexation has fallen behind. This forgone indexation can be ‘compensated’ if the policy funding ratio rises above 123%. Indexation can only be compensated in small steps, however: every year the pension fund may grant you additional indexation corresponding to 1/5 of the percentage points by which the policy funding ratio exceeds 123%. For example, if the policy funding ratio in a particular year is 128%, you may be granted a maximum of 1% (= 1/5 x 5%) in compensatory indexation. This restriction is imposed by law.

  • Why is indexation important for active members?

    The Philips Pensioenfonds flex pension plan is a collective defined contribution plan with an underlying career-average earnings ambition. That career-average earnings ambition means that the pension that you receive depends not only on your average earnings during your working life, but also the degree to which your accrued pension rights are adjusted during the accrual phase, which is how your pension will retain its value over time.

  • Surely the basic assumption was always that the pensions should reflect price inflation?

    The ambition of Philips Pensioenfonds is to raise current pensions annually. However, indexation on current pensions is, and always has been, conditional. That means that the pension fund does not have an obligation to increase your pension: the Board of Trustees decides whether to raise the pensions, and if so by what percentage. This will include an examination of various factors, including whether the pension fund’s financial health is strong enough to allow it to raise the pensions and by how much, and what the likelihood is of future changes in its financial health. In all its personalised information about indexation, Philips Pensioenfonds includes texts mandated by law to explain that your pension is not automatically indexed.

  • What are the various funding ratios, and which funding ratio is used for calculating indexation?

    One of the factors used to determine the financial position of Philips Pensioenfonds is its funding ratio. If a pension fund has a funding ratio of 100%, this means that its assets are precisely enough for it to pay its existing pension liabilities. Our website shows three funding ratios. Whether or not your pension can be indexed is determined by the ‘policy funding ratio’.

    - Actual funding ratio
    The actual funding ratio reflects how the pension fund’s assets stand in proportion to its pension liabilities (all pensions payable now and in the future).

    - Policy funding ratio
    Another way of calculating the funding ratio that is less subject to daily fluctuations is the policy funding ratio. The policy funding ratio is calculated by taking the average of the actual funding ratios over the past twelve months. By law, pension funds are required to use their policy funding ratio for deciding on various matters, for example indexation. The policy funding ratio is also used for other purposes, including to establish whether the pension fund’s buffers are sufficient.

    - Required funding ratio
    The required funding ratio is the policy funding ratio that the law says pension funds must have. If a pension fund’s policy funding ratio is at the same level as the required funding ratio, this means that it has the financial buffer required by law. The purpose of this buffer is to compensate for fluctuations in the value of the pension fund’s investments and liabilities. Exactly how high the required funding ratio is varies from one pension fund to the next, and is determined largely by the pension fund’s investment policy: the higher the risks in the investment policy, the higher the required funding ratio is.

     

     

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