Sections

Belgium set to guarantee returns

The Belgian government is set to put an end to months of heated debate surrounding the implementation of sector-wide pension funds by announcing that it has settled on a system of lifetime guarantee rates for the new hybrid DB/DC plans – one of the main sticking points between the legislator and industry groups.
With only one in three employees in Belgium in an occupational scheme, the Belgian government has been wrestling for some time now with the introduction of a second pillar pensions structure that would be both safe and collective in nature, but attractive enough to plug the gap in retirement cover.
The move, which has become a focus for other European governments faced with similar demographic concerns and budgetary deficits to Belgium, follows the lead of Fabrimetal, the pension fund formed for Belgian metal workers, which heralded a sea change in Belgian pensions – a DC pension fund with guarantees, for all employees in an industry sector.
However, the Belgian government ran into trouble in its bid to replicate the Fabrimetal story after ministers suggested that a legal minimum guarantee rate of 3.75% might be appropriate for such sector-wide schemes.
Pension fund representatives were alarmed, warning that such targets could be catastrophic for the industry as a whole and force pension funds to take a static view on their investments so as not to flout the legal return levels.
The compromise reached – the lifetime guarantee rate – will avoid any yearly worry about return levels by pension funds, whilst at the same time ensuring an average return of an expected 3.75% over, for example, a working life of 30 years if 1% of salary is contributed to the plan. For employees leaving a fund it is thought that the benefit level will be calculated on a pro rata basis. The result will be much like a cash balance plan with additional DC provision.
Henk Becquaert, cabinet adviser to the Belgian minister of social affairs and pensions Frank Vandenbroucke, a former president of the socialist party, explains that the ink is almost dry on the legislation, apart from a few points where last-minute decisions need to be made.
“These are high level discussions and it is possible that they will be debated by the council of ministers this Friday January_19. I don’t know if the council of ministers can make a decision then but it will be this month at any rate.”

Becquaert says the guarantee rate debate is still live but that essentially the “principle” has been agreed. “I see in the pensions sector a little bit of concern about this, but what it will mean is not an annual guarantee but an average guarantee. At the age of pension you have to give a guarantee over all the contributions that have been made – so it is a long-term guarantee.
“People don’t know this concept and they are not working with this up until now so we have to try to explain to them that over the long term it is not so restrictive as over the short term.”
He notes, however, that such a change necessitates a re-examination of Belgium’s strict minimum funding requirements for pension funds. At present, Belgian funds have to hold assets equal to their liabilities.
Under such a guaranteed return system, funds would look annually at their liabilities and translate the minimum long-term engagement as a yearly average of 3.75%.
Shortfalls, it has been suggested, would have to be looked at by the controlling authority, which would have the power to implement restructuring plans such as increased contributions.
“The insurance control board has to change its policy on the minimum requirement for pension fund reserves as a result of this guarantee, and that is something they will have to understand also,” says Becquaert.
Other points still up for final discussion, he says, include organisation, transparency and administration costs of the sector-wide pension funds, but also the fiscal advantages that can be applied.
Becquaert notes: “The tax issue is not opposed but the level of fiscal advantage has to be looked at, although I cannot go into too much detail here.
“The problem now is to put the people involved around the table to take a decision because there are a lot of other important issues that are being looked at currently by the parliament.
“Frank Vandenbroucke has already attempted to push this issue through, but the problem was that other ministers were too involved in other issues – so we have to wait for another couple of weeks. You never know how long this will take though and whether they will have enough time to discuss this new law.”
Becquaert is confident that a result can be achieved. But he notes that there is an added imperative to the current parliamentary debates: “Otherwise we are too late, because we are talking about pension plans and negotiations between unions and employers are starting now (collective bargaining/salary and benefit negotiations).
“We have to make it clear what the position is on sector pension funds, because if we don’t make it through this time we will have to wait two years before the next round of wage discussions in Belgium. There is really an urgency about going forward in this matter.”
Karel Stroobants, president of the Belgian Association of Pension Funds (BAPF), believes the main thrust of the legislation is also agreed: “We are now in a phase of background battles, but I think the outcome will be good.
“What I have heard from the controlling bodies is that they will adapt the minimum funding requirement in the legislation and change the interpretation level so that we will look at it over the long term and not year by year. We think the government has listened to what we had to say and will change this.”
Stroobants adds that he hopes the revised changes will take into account the statement of investment principles (SIP) and risk profile of different funds. “Volatility is OK, but if you are above or below set targets then you should have to react.”
He also points out the dangers in over-bureaucracy, welcoming transparency, but warning the government that over-complex information for scheme members could have the reverse effect.
“Another point we also want to see with sector-wide pension funds is that if there is a company within a sector which is big enough to opt out, then there should be a level playing field to do this, as long as the company can do as well as the sector fund or better.
“We want to avoid the kinds of issues seen in the Netherlands. You cannot discriminate against individual company pension funds.”

The BAPF is also continuing to press the government for a level playing field on income tax for occupational pension plans. “Pensions funds as with mutual funds want an EET (exempt-exempt-taxed) fiscal treatment. However, the government wants to know what it will cost them. I have tried to explain to them that it will cost absolutely nothing because everyone uses Sicavs anyway to avoid this_tax. This is the way around it.
“The government wants to put this issue in with the larger review of income tax and discuss which items are deductible and how they are accumulated and what the maximums involved are – but this is really affecting the second pillar pensions system.”
Stressing his optimism over the passage of the legislation, Stroobants also notes that the debate over the third pillar pensions system appears to have reached a status quo.
“There will, I think, be a little bit more investment freedom for third pillar funds, but with no link to the second pillar, which is the main point.
“The second and the third pillar in one basket would be dangerous.”

Have your say

You must sign in to make a comment

IPE QUEST

Your first step in manager selection...

IPE Quest is a manager search facility that connects institutional investors and asset managers.

  • QN-2467

    Asset class: Search for a broker (mainly ETFs).
    Asset region: Global.
    Size: 250m.
    Closing date: 2018-08-28.

  • DS-2468

    Closing date: 2018-08-24.

  • QN-2469

    Asset class: All/Large Cap Equities.
    Asset region: Global Emerging Markets.
    Size: USD 500m.
    Closing date: 2018-09-04.

Begin Your Search Here