Sector funds were intended to expand second pillar provision but they have been slow to take off. George Coats examines why
Earlier this decade then Belgian pensions minister Frank Vandenbroucke (pictured right) framed legislation intended to expand second pillar coverage by encouraging the creation of sector-wide pension funds. It followed parametric reforms implemented in the 1990s that would reduce the substitution rate of the state in the years ahead.
"At that time we only had second pillar pensions for higher-level functions and in very important sectors like petrochemicals," says Freddy Willockx, one of Vandenbroucke's predecessors. "We tried to achieve a democratisation of the second pillar, and the result was the Vandenbroucke law which introduced a capitalisation system in combination with a form of solidarity."
But since its implementation in 2004 it has been less effective than hoped. "I recognise that it has been disappointing," says Willockx. "We thought that with the development of the second pillar would be more rapid and I regret it has not been."
"There are two explanations as to why it has not moved at the speed we wanted," says Lut Sommerijns, secretary-general of the Belgian Association of Pension Institutions. "One is that certain bigger industries already had a system of pensions that were often managed in sector-specific mutual funds, so-called fonds de sécurité d'existence, which were organised for additional purposes like education and training, and additional social security allowances. The Vandenbroucke law provided a transitional period to move the pension portion to a real pension fund, and that only expired at the end of last year. The authorities approved two big funds - for the metal and construction industries - in December.
"The second reason is that the formation of a fund is the result of negotiations between the social partners at industry level and they take place every two years. So it takes a while to get on the agenda. And then difficult choices take time - they have to decide whether within the parameters of an agreed salary increase the workers should get cash now or deferred compensation in a pension plan."
In addition, some trade unions have not been willing to discuss the second pillar because they only wanted measures to be taken to support and strengthen the first pillar. "I will not defend the unions in that but you must remember that the unions that at the moment have a second pillar are in the strongest sectors - metal workers, construction, petrochemicals. It is not so easy to introduce in other sectors because the productivity gains are very low."
However, in the 2007-08 negotiations the principle of occupational pensions appeared to be an accepted element in discussions, says Sommerijns.
And it has already had an impact, she adds. "Prior to the Vandenbroucke law we did not even have 50% coverage and now it's already at 66%. The food sector has a sector fund, tourism is setting one up and we expect that by 2010 there could be sector funds for the wood industry, the food sector, hairdressers and the non-profit health sector that could cover 300,000 or 400,000 people depending on its scope."
"The target was to have close to 75% of the working population covered by the second pillar," says Johan Bourdeaudhui, the director of FBZ Electriciens, a sector fund established for blue-collar workers in the electrical industry. "We are a medium-sized sector with 25,000 employees but we have some large companies, and in general they have pension funds although this is much more difficult for the small and medium sized enterprises. The social partners agreed to create one for everybody."
The fund had €55m under management at the end of 2007. "The money inflow this year will be €8.9m," says Bourdeaudhui. "When we started the contribution rate was 1% of gross salary, and for 2008 it will be 1.46% - at a rough estimate this amounts to an average €351 per head per year. At retirement age this will generate an additional pension contribution of 3% of the last annual salary at most. " Ideally the contribution rate should be close to 2.5% but that will take another couple of years."
Bourdeaudhui concedes that this contribution level won't buy much of a pension but says it is difficult to raise. "In Belgium we have automatic wage indexation based on a consumption basket, so that part of any wage negotiation is already gone," he says. "Our last wage round agreed that the total salary volume should not increase by more than a fixed percentage over the next two years. Inflation takes the biggest chunk of it and baring in mind there are other demands on the money there's not much left for the pension."
FBZ Electriciens has not been transformed into an OFP. It was created in the wake of the 2001-03 market crisis and opted to establish as an insurance vehicle known as the Royal Decree 69. "This was developed in the early years of pensions schemes when people wanted an absolute guarantee that returns would be above inflation so it is the safest you can get but of course you pay for safety," says Bourdeaudhui. "It is entirely controlled by the insurance company, which for us is AXA. The company makes all the decisions and we have very little say in the asset management. It guarantees us a minimum return, which from 1 January this year is 3.35%, plus a possible profit participation. In the past the average return was close to 4.75%. In the medium to longer term I would like to see an average return of 6%, as an annual delta of 1.25 % in return over a period of 30 years would increase the pension reserves by at least 40%."
There had been plans to move a step closer to becoming a pension fund and gain asset management experience by switching to another vehicle, known as branch 21, where the insurer provides the minimum return guarantee and the client participates in the investment policy. Additionally, FBZ considered working with two or three investment managers to implement a more offensive strategy for a small portion of the portfolio.
In the event the social partners were not ready to take the step. "Now the objective is to increase the returns in 2008," says Bourdeaudhui. "But for next year or the year after we want to get out of the world of Royal Decree 69 and move to another vehicle where we would have much more input in how the investments are made, about durations and eventually put a small percentage in equities. At the moment everything is allocated to fixed income, which is the insurer's decision."