Belgium embraces new framework
The introduction of prudent investing has changed the face of the Belgian pensions market for the better, says the Belgian Pension Fund Association.
First pillar pensions are generally based on a PAYG-system. In 1997 pension payments amounted to E18.1bn, of which 63% went to the private sector, 28% to the public sector and 10% to the sector of the self-employed. This amount was financed through social contribution and tax money.
In the system, the old-age pension is calculated using a full private pension of 45 year working life for men and a career of 41 year for women. Each active year counts for 75% or 60% of 1/45th or 1/41st of yearly earnings, 75% if the employee’s spouse does not have a professional occupation or a pension, 60% for other employees. The yearly earnings are taken into account up to a ceiling of E34,371.75. This means that there is a maximum pension. The pension can be taken from the age of 60. The widow(er)’s pension amounts to 80% of the amount of the old-age pension of the deceased husband or wife.
The denominator of 41 for women is the consequence of a recent change in legislation to gradually eliminate the discrimination between men and women: it will change to 42 in 2000, to 43 in 2003, to 44 in 2006 to reach 45 in 2009.
The pension system for the self-employed is very much the same as the one depicted above. One difference is the ceiling level which is E46,710.23. A more important difference lies in the calculation of the old-age pension. The yearly income is multiplied with a coefficient. This fraction expresses the difference in contribution payment to the pension system for the two sectors: in the private sector both employers and employees pay a contribution on yearly earnings, in the sector of self-employed there is no employer’s contribution. The fraction amounts to 0.56751 for earnings up to E33,371.67 and to 0.463605 for earnings that exceed this amount.
The system for civil servants is the most generous one. Pension equals the average wage of the last five years, muliplied by the years in service divided by 60, where the maximum amount of years in service is 45 for both men and women. There is an absolute maximum amount of E4,669.10 a month. The widow(er)s pension amounts in general to 80% of the old-age pension.
In its coalition agreement, the new govvernment (liberals, socialists and the green party) commits itself to guaranteeing the viability of the first pillar by giving priority to the dismantlement of the public debt. Furthermore, it mentions three concrete initiatives for the first pillar: gradually raising the lowest pensions, especially those of the self-employed, regularly adapting the pensions to the welfare level, periodically raising the income ceiling.
The second pillar
Supplementary pensions in Belgium are not mandatory, and the total coverage is less than 40% of the workforce in private
industry. One of the reasons is that the state pensions are relatively high (see above).
In 1997, the contributions – for both group insurance and pension funds – totalled E3.35bn. The employers paid about 70%. The contributions to pension funds amounted to E0.94bn, which represents about 28% of the total annual funding.
The second pillar is based on funding (contrary to the first pillar PAYG). At the end of 1998, total assets in second pillar pension funds can be estimated at nearly E9.92bn. 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, 5.3% real estate and 5.9% cash and others. About 56% of the pension fund portfolios are currently invested in collective investment funds, which is essentially due to fiscal considerations: income from mutual investment funds that capitalise their investment income are not taxed.
Although pension funds have been founded since the Second World War and earlier, it was only in 1985 that a specific legal framework for pension funds was developed. This legislation applies the control-legislation on insurance companies to pension funds and organises company pension funds as not-for-profit or mutual institutions, having assets that are exclusively allocated to the financing of the pension scheme and cannot be used for any other purpose. Each year, pension funds have to submit a complete technical, statistical and accounting disclosure package to the control authority.
Ten years later, in 1995, a law dealing with the social aspects of supplementary pensions, was published. The main aim was the protection of the employee’s rights, determining among others, a maximum vesting-period of one year and stating that no improper distinction may be made in granting pensions to employees who belong to the same category.
A Royal Decree (RD) published on March 20, 1999 changed the investment rules for Belgian pension funds. This royal decree
provides pension funds with one of the most modern investment frameworks in Europe: based on a qualitative rather than a quantitative approach, it urges pension funds to invest in a prudent way and to spread the risk, without predefining minimum investment percentages any longer.
As a consequence of globally lower interest rates, another RD, changing the technical interest rates (hypothetical discount rate to calculate the actual value of the pension promise in DB-plans) from 7% to 6%, was published on July 16. This royal decree also changed the mortality tables to be used to calculate the minimally (by law) required technical reserves (the former tabels dated from the period 1968 – 1972).
Where the royal decrees just mentioned mainly have an impact on technical aspects of specific pension funds, the impact of the law, published in May 1998 allowing for so called ‘multi-employer pension funds’ is expected to have a great impact on the accessibility to supplementary pensions.
Indeed, this law allows firms to join together in a pension fund. In practice, this means that the small and medium-sized enterprise (SME) would gain access to the vehicle of pension funds. Because of their limited scale, the only real option for these firms used to be a group insurance. With the publication of the new law, this market should open for pension funds.
However, the law stipulates that a RD has to define the conditions of functioning of these multi-employer funds. This Decree is currently being debated by the interested parties. We hope to see it published somewhere in 2000.
Another RD that is to appear shortly is the so-called: ‘maxi-RD’. This RD will deal with the control on pension funds and revises the RD’s of May 1985. Again, we hope to see publication of this RD as soon as possible.
As for the future, the picture for the second pillar in Belgium looks rather promising: In their coalition agreement the new government states that the development of supplementary pension systems has to be stimulated. How this will be done in practice is yet unclear.
The Belgian Pension Fund Association
Address: Koen Van Gorp, Adviseur Belgische Vereniging van Pensioenfondsen, Boomkwekerijstraat 10,
Telephone: + 32 (0)2 514 56 56
Facsimile: + 32 (0)2 514 46 14
The Belgian Pension Fund Association was established in 1975 by 23 pension funds. Today, some 100 pension funds belong to the Association. They manage E8.7bn, or approximately 90% of the total assets owned by all the Belgian company pension funds and pension funds for the self-employed. Another 40 ‘associated’ members that are not pension funds support the Association. Membership is purely on a voluntary basis and requires payment of an annual fee based on the pension fund’s assets. Associated members pay a fixed fee.
The BPFA’s main objectives are to defend the interests of the pension funds and to serve its members through the provision of information and guidance.
To achieve the first goal, the BPFA is represented in the ‘Insurance Commission’, the official advisory body for the insurance sector and has regular contacts with politicians, employers organisations and unions.
The second objective is pursued through bi-monthly newsletters, monthly lunch meetings (on topics of asset management), infosessions (4 times a year, on topics of legislation), a yearly financial and fiscal survey,
ad-hoc mailings and surveys and regular seminars