Belgium: A time for courage and action
Karel Stroobants argues that doing nothing about the Belgian pension system is not an option if the country is to avoid collective impoverishment and generational conflict
As far as the pension issue is concerned, just as for other European countries, Belgium cannot escape the consequences of problems such as ageing and lower economic growth. The pension system in Belgium has been made additionally complex due to an excessively slow or non-existent decision-making process caused by the complicated political structure which has created an unclear division between political power and financing mechanisms.
It is also overshadowed by a series of taboos which hinder dialogue among the social partners and between the social partners and the government. Among these is the difference in employment status of white-collar and blue-collar workers and public employees' pensions.
The high level of public debt and budget deficits allows little room for manoeuvre. The standpoints of all social partners with regard to the second pillar are unclear and there is also the issue of competition between providers - commercial insurers and pension funds.
As a result, recent initiatives to correct or adjust a number of pension regulations have had limited success. The most significant were:
• In general: the setting up of a central pension database.
• Regarding the second pillar: the Supplementary Pensions Act (Vandenbroucke Law) which promoted sector-wide schemes among others and the legal framework for a pan-European pension fund.
• Regarding the first pillar: increase of the retirement age for women to 65 years; the Generation Pact (an incentive for working longer).
These initiatives have had varying success.
After six years, the Vandenbroucke Law hassucceeded in raising the coverage ratio for members of a supplementary pension scheme from 35% to approximately 66%. But this still leaves a large group unprotected, and even for those who are a member of a supplementary scheme, the contribution remains very limited (approximately 1-2% of income). Moreover, a (deliberately) unclear interpretation of the long-term guarantee has pushed many sectors towards an annually guaranteed and insured product, which is sub-optimal.
The large group (400,000) of government employees who were not recruited via the staff regulations of government employees (therefore, those who do not receive a government employee pension equal to approximately 80% of their last salary and financed under a pay-as-you-go system, but receive a statutory limited pension equal to that of a private sector employee), were left out in the cold. However, the Flemish municipalities are an exception and will have the opportunity, from the beginning of this year, to grant these employees a supplementary pension.
Although Belgium has modern, flexible, tax-neutral and coherent legislation, it has been unable to attract large pan-European pension funds. The political uncertainty and the less favourable image of Belgium are contributing factors, but it is also almost incomprehensible that multinational companies are not availing themselves of the possible savings that might be made by locating their pension funds in Belgium in these times of cost-cutting. Of course, the large number of subjective barriers also plays a role.
Despite all its measures, the government has not been able to keep people working longer. The number of working people over 55 remains very low.
The functioning of the country's large online pension database threatens to get bogged down in political discussions about its use. Will the database also be used for fiscal checking? Will this be the ultimate tool for organising an efficient control of tax-deductible contributions? Or will it be a means of reforming, or even increasing, the taxes on the amounts paid out? How will possible commercial use (or abuse) of the data be prevented?
In short, there are still many political obstacles which threaten to block the main objective of providing better, faster and more correct information to employees who should be able, at the click of a button, to find all the information regarding their future pension rights, carry out plan projections and, if necessary, take action. After all, people's main concern is how much money they will receive when they retire - who pays it is the least of their worries.
National Pension Conference
Everyone had great hopes when, three years ago, the government announced the establishment of a National Pension Conference to deal with the pension issue by 2010. Unfortunately, the conference never got off the ground.
The present minister for pensions reduced the entire matter to a national farce and the chairman of the conference has said that a broad reform process is out of the question. At most, there will be a few cosmetic changes. We now look forward to the promised Green Book in which, according to the minister, the right questions will be asked.
Pension funds and the crisis
Pension funds have weathered the financial crisis well and the losses incurred in 2008 were almost completely made up for in 2009. This was due, among other things, to long-term policy, coherent legislation on funding, funds' limited scale and therefore minor impact on the annual accounts of sponsors, and the absence of annuity payments.Pension funds succeeded, without too much impact, in getting through the crisis and regaining a reasonable coverage ratio. Their long-term real performance is still positive.
On the other hand, all funds were faced with higher fixed costs, caused, for example, by the demand for improved governance by the pensions regulator. These costs are charged to various departments of the sponsor and therefore not easily visible to the pension fund manager. It is only when these costs become visible in pension fund's accounts that benchmarking becomes possible and it becomes apparent that some smaller funds are no longer economically viable.
For many funds, the fixed costs are completely out of proportion to the annual contributions. Scaling-up is becoming inevitable, either via multi-company funds or conversion into (more expensive) group insurance contracts seems unavoidable.
In short, it is high time that measures are taken to implement reforms. Doing nothing is tantamount to ignoring a kind of deferred collective impoverishment. In Belgium, many pensioners already live in poverty. This can only become worse if nothing is done about it now.
Karel Stroobants is an independent pension fund director based in Belgium