A tumultuous year in the history of pension provision in Belgium is expected to climax this month when prime minister Guy Vrhofstadt presents his coalition government’s view of the future to parliament.
A major strand of his speech is certain to focus on multi-employer pension funds and industry-wide schemes. A law published as far back as May 1998 advocated a practice whereby small to medium-sized firms could band together to gain access to the vehicle of a pension fund. Because of their limited size the only previous alternative had been group insurance. Fewer than 40% of the Belgian workforce enjoys second pillar provision, a scandalously low figure by European standards. The vast majority of those are salaried staff, with wage earners barely represented.
That state of affairs has already begun to change, however, thanks to the country’s first industry-wide scheme, initiated by the metal industry. FabriMetal, the employers' association representing 2,000 firms in the industry, and the trades unions agreed on a defined contribution scheme with guarantees for the sector’s 150,000 workforce. Tax advantages make it an attractive proposition for the members, and the government is keen to encourage such developments.
At first the unions were concerned that such a plan would undermine the generous social security system, but the government’s commitment to lowering or even eradicating the crippling public debt is seen as a commitment to the first pillar pension.
This system provides a comprehensive array of benefits, and is financed on a pay-as-you-go basis. Employers and employees contribute with any shortfall being met out of general taxation. The government also has plans for this shortfall, however. It is planned to create a so-called ‘silver fund’, a state fund to shore up the system. The aim is to reduce the government’s debt, around 100% of GDP, and thereby reduce interest payments. These savings can then be syphoned into the new fund, creating a reserve to tackle the expected gap in the system in 2010, when the ageing problem is expected to kick in.
As elsewhere in Europe the government is also discouraging early retirement, especially in the civil service.
A full pension is payable after 45 years for men and 41 years for women, although in line with European legislation that discrepancy is being tackled. The current average pension is 60% of adjusted career earnings for a single person and 75% for a married couple, when the spouse has no entitlement. Limits apply, although there is no ceiling on wage-earners' pensions. This generous system has been perceived as a disincentive for employees to seek additional cover.
The latest moves are the continuation of a process begun in 1996 with the introduction of the ‘Colla Law’, which guarantees rights and security for plan members. This is of importance in some sector funds, guaranteeing portability. Most sector funds are PAYG operations, and the government is keen that they should come under the remit of the country's assurance chamber, meaning they will have to change to capitalised pension schemes. The FabriMetal scheme is seen by many as the perfect model. Employees are offered a double approach, accordingly some companies set up their own schemes and some join the collective.
The fund plans to use a third of an existing collective fund, built up from employers’ contributions earmarked for layoffs and sickness benefit, to kick-start the fund by upgrading the back service of employees.
Quite how far the government will go with reform remains to be seen. With expectation high within the industry, government spokesman have been advising caution, pointing out that the coalition suffers stresses from left and right, hinting that compromise may lead to watered-down proposals.
With occupational pensions widespread for salaried employees, trades unions now feel the time is right for a more radical approach for wage earners. With a new round of social-contract talks due soon, some progress should be made.
The second pillar is funded, and the latest figures showed total assets of around E11.6bn. The last investment survey showed an average investment profile of 31.2% foreign equity, 18.1% Belgian equity, 14.8% foreign bonds, 24.8% Belgian bonds, and the remaining percentage divided between property and cash.
Meanwhile pension funds are reacting to last year’s decree liberalising investment restrictions. This shifted the emphasis from quantitative to qualitative investment, encouraging funds to invest prudently and spread the risk, and removing some of the minimum percentages, such as the 15% minimum requirement in Belgian government bonds. However, many of the old limits are still in place such as a maximum investment of 30% in quoted securities, and a 25% maximum for mutual funds. Property holdings are amended in line with European-wide legislation, and explicit permission to use derivatives for hedging purposes is established.
Other issues, such as the treatment of providers, will have to be tackled by the government. Already lobbying groups are at work making their case. The Belgian Association of Pension Funds (BAPF) claims complexities in the current system mitigate against its members. Pension funds are awarded charitable status, which means they have to pay a withholding tax as well as a tax on assets. Insurance companies, on the other hand, are dealt with under company law where no double indemnity applies. Pension funds could avoid this anomaly by investing in mutual funds, but the organisation believes this is an anomaly. About 56% of pension fund portfolios are held in collective investment funds, essentially for tax reasons. Income from mutual investment funds that capitalise their investment income is not taxable.
The BAPF is also keen on specific legislation for the industry, rather than being governed by the insurance regulator. The insurance industry meanwhile claims that sector pension funds have tax advantages, as the funds are seen as ‘social contribution’. There is no doubt the complex tax system needs to be addressed, but it is not clear how far the government will go. Should contributions be tax exempt? Should pension payments be taxable?
Low liquidity has encouraged Belgian funds to look abroad for their investment. The arrival of the euro has also encouraged this. Also more than two thirds of Belgian pension funds outsource asset management, particularly high for the euro-zone.
The past two years have been a period of challenge and that challenge has been met with reforming zeal. It is clear that, partly driven by EU pressure and partly by concerns about the social security system, the government is preparing to tackle the problems head-on. Whether the reforms are as radical as many anticipate is another matter. With such a broad spectrum of opinion in the government, the middle road may not be the best option.