New pensions legislation that came into effect at the beginning of this year will have an impact on both the first and second pillars.
The law Belgium is tackling several issues at the same time, but they can be divided into two main categories.
First, the government is launching a serious bid to attract multinational companies to domicile their pan-European pension schemes in Belgium. This is being done through the creation of a new entity, the organisation for financing pensions (OFP).Second, the government has announced parametric reforms to address the long-term sustainability of the state old-age pensions system.
Last October the EU pensions directive was transposed into Belgian law. The legislation has an impact on both local pension funds and future cross-border, pan-European pension funds.
The royal decrees finalising the
legislation state that one of the government's intentions is "to create a framework for the development of Belgian's financial position as a centre of activity for pension funds active over the entire territory of the European Economic Area".
The OFP has been created as a new legal entity and is intended to host both pension schemes and their funding. It is a regulated vehicle that is incorporated within a favourable tax environment. OFPs will be subject to corporate tax at such a minimal taxable basis that it will be negligible.
This is intended to prepare Belgium to accommodate companies looking for pan-European pension fund solutions.
Whether this will have the intended effect has yet to be seen but at least a top-performing framework exists to accommodate pan-European pension funds under the most competitive conditions.
However, the immediate winners are most of the existing domestic pension funds. Not only will they benefit from a more tax friendly environment, but the OFP is an entity in which they can operate that enhances professionalism and a global strategy incorporating funding, asset allocation and liabilities.
Conversion from the existing pension fund structure to the OFP is reasonably straightforward and has to be completed before 2012.
The immediate tax wins for existing pension funds converted to the OFP are the aboliition of an 0.17% asset tax and the possibility of recovering withholding taxes.
An important issue is the change in the way that the actuarial funding of pensions will be viewed in the future.
Former pension fund legislation was strongly driven by short-term quantitative checks on minimum funding and solvency requirements. The new prudential control is more qualitatively driven.
Of course, a pension fund will always have to be funded to the extent of the vested rights that are due in case of its discontinuation.
It now has to be able to prove the reasonableness of the assumptions used for funding purposes in view of long-term durability taking into account the structure of the investment portfolio.
Asset liability management may be used to illustrate that the assumptions are reasonable and justified over the long term. It should be noted that many Belgian pension funds presently calculate the funding reserves at the minimum interest rate of 6%, which is now one of the elements subject to justification.
The OFP will invest in accordance with the prudent man rule. It will draft a statement of investment principles that will at least include the weighting method for investment risk, risk management procedures and the strategic spread of investments taking into account the duration of the liabilities.
Investments have to be in line with assumptions as used for funding purposes, or vice versa.
A fund's statement of investment principles will be reviewed at least every three years or as a result of any change in the investment policy. The statement will be communicated to the Belgian regulatory authorities.
The legislation introduces a global framework that will enable Belgian pension funds to increase their professional approach in providing pensions, without being suffocated by rules on funding and investment.
Management of the pension funds will demand increased responsibilities and introduce rules of corporate governance. This will enable them to fulfil their tasks with respect to the affiliates and their beneficiaries, and the sponsoring companies and the shareholders.
Meanwhile, the Belgian state pension system is under pressure. The European Pensions Barometer 2006 Report, organised by Aon Consulting UK, ranks
Belgium 25th of the EU's then 25 members. The barometer provides an overall assessment of the pension risks EU countries face and focuses on the impact or strains that pension systems place on the economy and citizens.
The main cause of Belgium's severe pension problems is its demographic position and, more specifically, the low degree of participation in the workforce of those aged between 55 and 65.
As a result the state pension, although not among the most generous, is still not cheap to provide. Consequently, at the end of 2005 the government published what it called a ‘generation pact', which included a number of measures to improve the state pension dynamics.
The pact, which is now in the process of being implemented, is intended to create economic growth through skilled employment and to protect the Belgian social security system.
The pact included 66 measures that focus on creating employment for younger employees and increasing the participation of older employees.
Only 30% of Belgians aged between 55 and 64 are employed, half the figure of Denmark, for example.
Although employees can legally retire from 60 if they meet the criteria of number of years of service many under 60 are included in early retirement programmes, which are basically unemployment schemes with an additional top up.
The changes introduced by the pact included a pension bonus for older employees who continued to work and a tax advantage for second pillar retirement benefits for those employees who stay at work until retiring at 65.
In addition, the criteria for future early retirement programmes have been tightened. The use of the early retirement programmes is gradually changing. Before the pact, early retirement was the first instrument considered when a company had to restructure so older employees were made unemployed but with the status of a pensioner. Now employer and employee organisations are focusing on other solutions that can keep older employees at work, including outplacement.
Patrick Marien is an account director at Aon Consulting Belgium