Covering the waterfront
Second pillar pension coverage in Belgium has tripled in five years and may have doubled again by next year. The country’s efforts to give its second pillar a shot in the arm have fulfilled, if not surpassed, expectations. So why are so many people still complaining? The beneficiaries seem happy enough.
Second pillar pension provision in Belgium got off to a slow start. This has been attributed to a number of factors, among them the difficult economic circumstances of recent years. But more fundamental than the economic climate were structural issues in the Belgian economy, notably the existence of a large number of very small companies.
“We saw from the statistics that there was almost no access to pensions in these small companies,” says Henk Becquaert, head of the strategic unit of the ministry of the environment and pensions in Brussels. “Employers said that it is a lot of work, there are a lot of uncertainties in terms of fund performance, and that they simply don’t have time to put into place second pillar pension schemes.”
The first discussions on the subject took place about five years ago and involved all interested parties: government, the social partners consisting of the employers and the unions, and the pension funds.
It was felt that the best way to provide access to pensions for the employees of the smallest companies was to create industry-wide pension schemes for each sector: metal workers, construction workers and so on. “One of the objectives was to cover
as many people as possible,” says Becquaert. “The legislation was a possibility to get into the smallest companies.”
An important element of the discussions was the fact that legislation was required for the number of industry sectors such as the metal workers and construction which already had pension arrangements in place. “These were in a grey zone in terms of legislation,” says Becquaert. “Were they first or second pillar? What were the requirements in terms of taxation?”
In 2001 the government signed a common declaration with the social partners, which set out the aim to promote second pillar pensions through this kind of scheme. At the beginning of this year the Vandenbroucke Law came into effect, named after Frank Vandenbroucke, the Belgian minister of social affairs, work and pensions. Existing industry-wide pension arrangements have until January 2007 to comply.
The success that sector funds have had in stimulating the second pillar in Belgium is clear to see. When discussions began five years ago, about 200,000 people were covered by company pension schemes; now the figure is 622,000. “I am really satisfied with progress,” says Becquaert.
He believes that the bi-annual wage negotiations scheduled to for the beginning of next year could add a further 700,000. “That will be the real test,” he says.
There are 28 schemes already up and running, the largest of which are the construction and the metal workers’ schemes; a further 19 sectors, among them the building workers, are still under discussion.
While the sector schemes are defined contribution (DC), Becquaert estimates that they could
add up to 25% of final salary on top of the maximum state provision of around 50%.
The schemes are non-contributory. As most of the schemes represent a new cost for employers, contributions are very low, ranging from 0.5% for schemes that have only just started, to 1.5% for schemes that have been up and running for a couple of years. Becquaert expects contributions to increase to between 4 and 5% in the near future. With funds in their early stages and still very small, investment strategy is generally prudent.
Erwin van Doorn, senior consultant at Aon Consulting in Brussels, says: “Most sector schemes are effectively paid for by the employees since the financing is deducted from the salary budget agreed through collective bargaining.”
In spite of the success that the law has had in its ultimate goal to boost second pillar provision, there remain significant areas for improvement.
“The law needs to be polished,” says Karel Stroobants, president of the board of the pensions consultancy Akkermans Stroobants and Partners. “It is too detailed and some technical questions are almost unrealisable.”
One important element was that the law provided for a special legal structure for the new sector funds. Today every pension fund has to be a not-for-profit or mutual insurance company. “These two vehicles are not quite the right structure for those sector funds,” says Stroobants. “And the new legal structure for pension funds is not yet finalised.”
Ann Devos, investment officer at the Fonds de Securité d’Existence des Ouvriers de la Construction (social fund for the construction workers), agrees that there are some points where the law should be improved. “There should be more flexibility for existing systems to adapt,” she says. “It is not very clear what we should do with the existing benefits; the law just says we have to change within three years. There is a lack of information regarding what way we should change what we can and can’t keep.”
The scheme can be managed either as a pension fund or by being outsourced to an insurance company. The latter have been the most popular route as most sector schemes, in these early days, do not have the expertise to deal with the huge amount of detail, and the risk, involved in running a pension fund. Only the larger schemes that have the management and financial resources have taken the pension fund option, the main benefit of which is greater control for the scheme sponsors.
“There are so many new issues to tackle,” says Stroobants. “Imagine a pension fund on day one: the manager has no experience and is confronted by a complicated law and the need to produce a guarantee in a bear market even though he knows nothing about asset management. And he has to administer maybe over 100,000 individual accounts. After a few months he has a nervous breakdown and opts for full outsourcing. He prefers an insurance contract to get rid of the risk and the administration.”
But Stroobants believes that the real problems, like the collection of employee data from thousands of participating employers and communication with members, are not solved by that kind of outsourcing.
Becquaert agrees that the monitoring of individual scheme members is a major challenge. “Mobility is increasing,” he says. “People are moving from one company to another and it’s an issue to follow them. We are preparing a solution to help the sector schemes follow their members.”
The key issue here is accessibility to the social security database, and there is consensus that improvements are needed. Fritz Potemans, is social adviser to the Agoria pension fund that runs the metal workers’ scheme. “The Belgian government should work to have the data on the Belgian workers on a more effective basis,” he says. “There are lots of discussions going on about confidentiality of data. It’s heading in the right way but the work is not finished.”
He adds: “We don’t get the data as quickly as we want it. And the way we want it is not the way the social security wants it. If you want it in the right format you have to go via another institution and pay again. We want data without having more cost.”
The law states that when employees leave the sector, they should be informed of their rights wiithin a certain time limit, says Devos. “However, within this period they could have re-entered the sector without us knowing. To calculate the employee’s entitlements we need to know his salary, the days he worked and the days he was sick, but also when he started and when he left. In practice we will encounter problems to get this information in time and accurately.”
The sector funds have to provide a minimum rate of return of 3.25% on employer contributions. This has to be achieved over the lifetime of the individual member plan. “From a risk point of view this is achievable but complicated to manage,” says Stroobants. “But how do they define a fully funded scheme that is underfunded at the end of year one, two and three?”
But the movement of workers across sectors gives new meaning to the term ‘lifetime’. Devos says: “In the construction sector it would come to an annual guarantee because mobility is very high. Every year one in 10 workers changes employer; we cannot take the risk of thinking that they will all leave their reserves with us.”
Stroobants believes that the ideal solution would be a requirement to measure the funding level once a year and prove that there is a risk model to achieve full funding within a upper and lower limits in accordance with the risk profile. “If you go to the bottom of the band you have to restructure the fund,” he says. “But if you are overfunded what is going to happen to the money? The regulator must finally state clearly how they would control that guarantee.”
Concern has been expressed about the fact that the guaranteed return of 3.25% is an arbitrary number. “There is no link with the economic environment at all,” says Stroobants. “The guarantee should be defined with an economic link and reviewed every three or four years for stability.”
Frank Rummens of Pragma Consulting notes: “The 3.25% figure does not take into account inflation. For the beneficiary of a pension scheme, it is not the nominal amount that matters, but the purchasing power of it. One cannot exclude in the future inflation rates of 3.25% or higher that would devalue pension reserves. Therefore, most pension fund consultants do not favour this restriction.”
Transparency is an issue that might challenge the new sector schemes given the additional layer of management at sector level. Becquaert says: “We have also included transparency requirements in the legislation so employers can follow what is happening with the management scheme. A flow of information creates confidence in the system.”
The law limits the amount that the sector funds can charge their members to 5%. “We have some problems covering our costs with this charge,” says Johan van Buylen, director of the electricians’ social fund. Part of the problem is the cost of collecting the data referred to earlier.
Of the total contribution to the fund, 95% goes to pension provision and 5% goes to a so-called ‘solidarity’ fund which covers sick pay, unemployment benefit and death benefit. Van Buylen notes: “5% of 5% of 1% is not very much to work with, especially in the start-up phase.”
Enabling efficient management will now be crucial if momentum is to be maintained.