Pensions for start-ups and scale-ups: pension plan or retirement annuity?
For start-ups and scale-ups, every euro counts. Investing in growth and attracting new talent is often high on the agenda. A pension plan can quickly feel like a substantial, long-term financial commitment. For this reason, some employers choose to let employees make their own retirement arrangements, for example through a group retirement annuity arrangement, also known as lijfrente in The Netherlands. This offers freedom and flexibility, but it also has a downside: responsibility for building up retirement savings largely shifts to the employee. According to Arjan Möller, Pension Specialist at Meijers, this is an important point to consider.
Making your own arrangements may sound attractive
A retirement annuity is an individual retirement savings solution. Under the group arrangement, employees may voluntarily take out a retirement annuity and determine how much they contribute, subject to the applicable tax limits. An employer may, for example, provide additional salary or an allowance, but the employee must then act. This offers advantages for a growing business. There is no immediate need to establish an occupational pension plan, and the employer retains greater flexibility over employee benefits and costs. “For start-ups and scale-ups, this is understandable,” says Arjan Möller. “They grow rapidly, may not know what the company will look like in three or five years and may be reluctant to commit too soon.”
Freedom does not automatically result in pension accrual
This is the key difference. Under an employer-sponsored pension plan, the employer arranges pension accrual for its employees. The plan also includes benefits in the event of an employee’s death or occupational disability. With an individual retirement annuity, the initiative lies with the employee. Employees must select a product, determine how much they need and continue making contributions. A retirement annuity does not in itself provide death or disability cover, so separate arrangements are required for these risks. This does not happen automatically. A younger employee may prefer to use the money for a home, travel or other expenditure, while another may repeatedly postpone making retirement arrangements. This may not appear problematic in the short term, but decades later the employee may find that significantly less retirement capital has been accumulated than expected. “An employer may say: I give employees the freedom to make their own arrangements. But the question is how many will actually do so. Freedom and flexibility may sound attractive until someone later discovers that they have accumulated insufficient retirement savings.”
A pension plan is part of being a responsible employer
For start-ups and scale-ups, the decision involves more than cost alone. A pension plan forms part of the overall employee benefits package. This becomes increasingly relevant as a business grows. While the first ten employees may primarily be attracted by entrepreneurship, equity participation and growth opportunities, their needs often change as the workforce becomes more diverse. Employees then consider not only their current salary, but also their long-term financial security. A pension plan can therefore support responsible employment practices and enhance an organisation’s attractiveness in the labour market. Pension accrual is only one aspect. Protection in the event of death, occupational disability or an accident also contributes to being a responsible employer. These risks can be covered through supplementary group insurance arrangements, such as group term life insurance, WIA disability insurance and group personal accident insurance.
Cost does not have to be an all-or-nothing decision
Budget is a common concern. A pension plan represents a recurring cost. For a company that may recruit dozens of new employees each year, these costs can increase quickly. However, the choice does not have to be between offering no pension at all and immediately introducing a highly generous pension plan. Meijers can help tailor a pension plan to your company’s financial capacity, stage of growth and ambitions. The financial impact of different contribution levels can be assessed in advance for both employer and employee. This provides greater control over costs and prevents pensions from becoming a topic only when employees begin to raise questions.
Pension plan or retirement annuity?
A group retirement annuity arrangement may be a suitable solution in certain circumstances, but it is not the same as an employer-sponsored pension plan. It is also important to assess which risks relating to death and occupational disability remain uncovered. The most appropriate option depends on your stage of growth, financial capacity and the role you wish to play as an employer in supporting employees’ pension accrual.
Which employee benefits solution is right for your organisation?
Meijers’ pension specialists can assess the available options, supplementary insurance cover and associated costs. This enables you to make a well-informed choice that suits your organisation today and supports its growth tomorrow.
