Op-Ed: “Putting sand in the Dutch Pension ‘Clockwork Orange’: the YS case” by Hans van Meerten
Many – if not all – Member States of the EU are in the midst of a thorough pension reform. The recent COVID-19 crisis only accelerates this need for reform.
At the end of September 2020, the Court of Justice of the EU delivered a case of paramount importance for pension reform (the YS case, C-223/19).
In 1992, the applicant YS concluded an occupational pension contract with semi-private undertaking NK (see below). That agreement contained a ‘direct defined benefit pension’. In addition, an index-linking clause was agreed on. However, YS was granted no indexation. Therefore, YS filed a complaint against NK before the referring Austrian court, (i) disputing the withholding of those amounts and the fact that his occupational pension had not increased and (ii) seeking a declaration of his future rights.
For a general description of the case, I refer to an Analysis by Luca Ratti.
In this Op-Ed, I will focus only on a part of the judgment: pensions and property rights, in particular on the impact of the ruling in the Dutch pension reform. In YS, the Court seems to put sand into the ‘Clockwork Orange’.
First, a short explanation of some ‘pension jargon’. In principle, pension schemes can have a Defined Benefit (DB) or a Defined Contribution (DC) nature. Simply put: the income received after retirement from a DB scheme is guaranteed whilst the outcome of a DC scheme is uncertain as in a DC scheme only the premium (the contribution) is defined.
Furthermore, ‘conversion’ of pension rights and entitlements means the collective conversion of accrued pension ‘guaranteed’ DB rights and entitlements arranged by the relevant pension fund into rights to a different (more) conditional DC character.
Of course, legislation that enables conversion raises questions of its compatibility with European law.
That said, the YS case made a few things very clear:
- Pension rights can be a property right;
- Article 17 of the EU Charter of Fundamental Rights governing property rights has direct horizontal effect;
- An infringement of property rights can be justified.
1. Pension rights
The European Court of Human Rights in Strasbourg has already held that contributions to a pension fund may, in certain circumstances, create a property right. The EU Court in YS now definitely follows this line of reasoning. It states at paragraph 91: ‘It must be held that the conclusion of a contract relating to an occupational pension generates a proprietary interest with respect to the recipient of that pension.’
2. Direct horizontal effect
Since the case of AMS, it was unclear whether Article 17 of the Charter had direct horizontal effect. In YS, the applicant is a former employee of NK, a limited liability public company in which the province of Lower Austria holds a participation of approximately 51%. But NK is a private undertaking and YS directly – and with success – invoked the Charter against NK.
With the YS case in mind, in principle every pension participant in the EU with an occupational pension scheme can argue directly against a (private or state controlled) company and/or a pension fund, that his or her pension rights as guaranteed by the EU Charter are infringed. This is truly, again, ‘Sharpening the Teeth of EU Social Fundamental Rights’.
In principle, to emphasise, Article 17 of the Charter can be horizontally invoked. It is common case law that the Charter only applies as long as a Member State introduces measures that can discriminate on, in this case, the grounds of sex or age. If so, these measures come within the field of application of EU Law and the Charter comes into the fray. However, in a horizontal situation, Article 17 of the Charter would have direct effect, because the ruling YS concerns the two rights that the Court has confirmed as horizontal: equality on the grounds of sex and of age.
3. A justification?
In the YS case the Court held that any limitation on a right to property must be provided for by law and respect the essence thereof and, in compliance with the principle of proportionality, must be necessary and actually meet objectives of general interest recognised by the European Union.
In YS, according to the Court the limitations on the pension rights limit only a little part of the total amount of the DB pensions, so that they cannot be considered to affect the essence of those rights. Also, it can be argued that limiting pension rights above a certain threshold can be justified: these restrictions appear to be necessary and to actually meet the objectives of general interest of ensuring the long-term funding of State-funded retirement pensions.
In other words: the State can justify the infringement of the property right but under strict circumstances.
As said in the introduction, many Member States of the EU are affected by this judgment. IPE made this very interesting overview. The YS judgment concerns all State measures that have an effect on pension schemes. Let me mention a few examples.
In France, in 2019, then-prime minister Philippe unveiled a radical reform of the pension system, as introduced in 2017 by Macron. With regard to occupational schemes, the new scheme would replace social security and AGIRC-ARRCO, the existing (unfunded) second-pillar pension regime for the private sector.
In Spain, pension reform seems to be put on hold, which is worrying. Spain is ageing very rapidly and demographic challenges probably will significantly increase the burden of age-related expenditure. The YS case might delay reform even further.
Germany, as IPE reports, ‘goes DC’. The so-called ‘Betriebsrentenstärkungsgesetz’ (BRSG, law to strengthen occupational pensions), redefines occupational pensions. It is quite revolutionary that Germany, a classical DB country will, for the first time, see pension promises without guarantees – collective defined contribution (DC) plans.
Another, at least in theory, DB country is the Netherlands. Pension reform has been discussed for decades. Conversion of the existing pension rights (worth around 1,600 billion euros) in the Netherlands is one of the biggest challenges. The Dutch government wants to justify conversion of DB into DC with an appeal to the general interest (affordability of the system). This seems unlikely since YS, for two reasons.
First, since 2002 the reduction of benefits in light of the coverage ratio of pension funds has been postponed five times. Admittedly, the argument of ‘affordability of the system’ seems very valid, but the argument loses its strength if (for political reasons) the (legally obliged) pension cuts are postponed repeatedly.
Second, the Dutch conversion changes the legal nature of the contract from DB to DC. If this is not touching upon the ‘essence of the pension rights’ (recital 92), I don’t know what is.
Prof. Dr. H. van Meerten is a Professor European Pension Law (funded by Gak) at Utrecht University and a Dutch bar admitted lawyer. Hans has extensive knowledge of the various aspects of EU-legislation and processes. Since 4 September 2018 he has been member of the OPSG (stakeholdersgroup) of EIOPA.