Future of Belgian second pillar
It is a sign of the times that the recent Symposium of the Belgian Association of Pension Funds (ABFP/ BVVP) in Brussels, entitled ‘A social debate concerning the role of the second pillar’ – significantly, the first ever held in conjunction with the Professional Union of Belgian Insurance Companies (BVVO/UPEA) – was addressed not only by two of the country’s most senior ministers, but also by Prime Minister Guy Verhofstad.
The resonance of the symposium’s prestigious attendance goes further than just demonstrating a sense of openness and solidarity in Belgian pension reform.
It represents, in part, an engagement by national governments in supplementary pensions questions, which has never been higher.
Whether it be the recent Myners Report initiated at the behest of UK Prime Minister Tony Blair to look at occupational pension fund investment or the German government’s attempts to drive through private pension reform in a bid to cut back the state social security bill, the spectre of future demographic imbalances in the pensions arena appears to have set the touch paper for reform.
The actions of the European Commission on supplementary pensions in the background have undoubtedly had a knock-on effect.
But as the engaged debate at the Belgian symposium demonstrates – the two sides don’t always see eye to eye.
Prime Minister Verhofstadt’s speech gave the governmental broad-brush view on the pensions problem. Referring to a recent study by the KBC bank/assurance group, he noted that a survey of 700 Belgian workers and 300 pensioners showed only 14% were able to correctly estimate their future pension while at least 55% overestimated the amount they would be receiving in retirement payments and 63% believed they would have no future problems with their pensions.
Pointing to the expected increase of 800,000 pensioners between the years 2010 and 2030, he commented:
“According to prognostics total spending linked to pensions between 1996 and 2030 will have increased by practically BEF1.2trn.
“A clearer way of looking at it is to say that it will represent a difference of 2.2% of GDP or in other words an increase of 20% of today’s pension budget.”
His government’s response, he pointed out, was twofold; through the ‘Silver fund’ – a reserve designed to meet future social security shortfalls and through occupational pension reform – part of which has been suggested could involve guarantees of up to 3.75% on defined contribution schemes in both corporate and fledgling sector-wide pension plans.
Herein lies the clash between government thinking and industry responsibility.
While Verhofstad applauded the responsible approach by companies in the pensions arena, there were undercurrents of dissatisfaction from occupational pension funds themselves about the proposed demands being put before them.
Karel Stroobants, president of the Belgian Association of Pension Funds, while noting his regret that measures had not been taken in 1997, expressed his satisfaction that the government was finally addressing the pensions problem.
“The challenge launched to insurance companies and pension funds is not without importance. It is up to us therefore to pull up our sleeves and realise the conclusions that have been reached in the shape of an accessible, well performing and successful second pillar.”
Nonetheless, he laid down some points of order on which he said the government needed to examine where political élan bumped into serious practicality.
“The government does not wish that the financial risk in pension funds be undertaken by individuals. This it feels can be realised by the obligation of guaranteeing a minimal return rate.
“However, this undermines the long-term aspect of pension funds. When the government starts asking for an annual financial balance in pension funds, this effectively kills off the potential benefits of prudent investment in risk capital. We would miss our goal!”
Stroobants again made the call for a level playing field in the Belgian pensions arena: “I draw your attention to the fact that pension funds still pay a ‘precompte mobilier’ on their revenue – despite this being more or less theoretical due to the use of Sicavs.
“While Sicavs can undoubtedly bring added value to portfolios, it is unhealthy that taxation considerations should intervene in the constitution of a portfolio. It makes for less transparency.”
Hervé Noël, deputy financial manager at the Brussels-based Tractebel pension fund joined the argument on dynamic pension fund investment, by noting the healthy performance of Belgian pension funds now they have reached the 50% level in equities.
“Thanks to dynamic management we have had more than 10% returns over the last five years and we have been able to benefit from diversity and good risk management.”
“With DC plans the financial risk is on the participant and there is a pertinent question to be addressed here.
“The objective is to use the financial markets as a means to an end therefore some kind of minimum guarantee is important, but the higher it gets the more unrealistic it gets.”
Noël noted that he was unsure whether the government had thought through the implications of pension funds having to guarantee these levels. “This could stifle the ability of pension funds to invest without this guarantee worry hanging over their heads.”
Frank Vandenbroucke, the respected minister for social affairs and pensions, however, was unequivocal about the possibility of pension funds achieving the proposed guarantee rates.
“It is not because there is a minimum guarantee that returns become lower, this is incomprehensible.
“In principle there is no reason why this should engender any less dynamic investment, because there is no problem with opting for every possible type of investment vehicle.”
Vandenbroucke’s argument appeared to be that the government had freed up investment restrictions for the industry and that now a guarantee was needed to move forward the pensions debate on a social level.
The issue has raised the hackles of the pensions industry, which points out that investment is not so clear-cut.
From the government side, Charles Picqué, minister for the economy and scientific research, pointed to the large number of sector workers in Belgium not covered by supplementary pensions in Belgium as one reason why they should be favoured to bring about any meaningful legislative change.
Talking about the necessity of transparency security and portability for industry sector pension funds: “To avoid the pitfalls that we have seen abroad,” he also raised the topic of guarantees, but acknowledged that this would be a more difficult subject to broach with the pensions industry.
Paul Soete, head of the Fabrimetal industry-wide scheme for metal workers, gave his views on what the outcome of the debate might be.
“We could see a variable guarantee level for DC plans, but we should envisage a long term return because we already have the dynamic investment freedom to do this. The guarantee could take the form of an insurance cover.”
With the legal framework for pension funds in Belgium soon to go before the country’s chamber of deputies for consideration, discussion between the government and pensions industry will undoubtedly roll on in order to find a suitable compromise.
The climate of engagement between the various Belgian authorities is to be applauded. But as is often the case politics and pensions can mix like oil and water. A clean solution is hard to come by.