Belgian retirement provision is structured around a three-pillar system. Pillar one is a ‘pay-as- you-go’ system organised by the government on the basis of social security contributions, also known as a repartition system. Pillar two consists of supplementary pension schemes organised on a collective basis by a company or group of companies, by an economic sector or by profession. It includes group insurance contracts or self-administered funds (pension funds). Reserves are build up through capitalisation of contributions by employees and employers.
The second pillar amounts to e31bn, of which pension funds account for 32% or e10bn (1998 figures). Supplementary pension schemes are not mandatory. The coverage is limited. Less than 40% of the employees in the private sector benefit from such a scheme. Nevertheless, this is expected to change in the near future.
Pillar three consists of long-term savings on an individual basis. Individual persons have access to appropriate financial instruments offered by banks and insurance companies. Pillar three amounts to e31bn, of which 74.4% is invested in life insurance products.
General and legal framework and regulatory developments
The government (a liberal-socialist-ecologist coalition) that came to office in 1999 explicitly stated its awareness of the importance of dealing with the general issue of retirement provisions in a society with an ageing population and social security expenses under pressure.
The government has taken action along two lines: ‘Het Zilverfonds’ (The Silver Fund) and the reform of the second pillar.
The Silver Fund is a fund aimed at strengthening the financial basis of the first pillar pensions. Given favourable economic conditions, it will be gradually funded – via non-fiscal endowments – up to e120bn by 2030.
The goal of the reform of the second pillar is to facilitate access to complementary pensions for a larger part of the population. This ‘democratisation of the second pillar’ marks a change in the view on complementary pensions as solely a surplus benefit for a distinctive group of employees towards the concept of complementary social protection. In this reform so-called ‘sector schemes’ play a key role. To facilitate the introduction of pension plans a sectoral framework is put in place that can organise complementary pension plans on a more efficient level of economic scale. The sector plan will be set up by collective labour agreement.
Another principle guiding this reform is the correct sharing of risk. The government has introduced a minimum guaranteed return for the employer contributions in DC-plans.
An innovation is the ‘social plan’. This can be a sector plan as well as a pension plan of an individual company. An important condition for such a plan is the ‘solidarity’ commitment, meaning that certain risks such as permanent disability, death or the financing of pension rights during periods of unemployment, sickness, and so are covered.
This new and far-reaching legislation is due to be discussed in parliament in the next few months. The second pillar and the pension funds should benefit from this new legislation.
Last year saw the finalisation of the control legislation with the publication of three royal decrees on 7 May. These decrees replaced or adapted existing legislation. They also confirmed the new investment framework for pension funds already adopted in 1999. Recall that this 1999 reform meant the abolition of mandatory investment in Belgian government bonds and the introduction of financial instruments such as options and futures. It also made real estate investment possible in the whole EU.
Performance and investment of Belgian pension funds in 2000
Every year the BAPF analyses the return of funds and the allocation of assets in the previous fiscal year. Some 135 funds took part in the most recent survey. In 2000 total assets amounted to e9.8bn; 19 funds showed assets above e125m. Participating funds showed an average return (before inflation) of –0.07%. This rather weak result reflects the gloomy state of the financial market. In 1999 pension funds still attained an impressive 15%.
However, pension funds are long-term-oriented by definition. For five and 10-year periods they still show yearly averages of respectively 12.7% and 10.6%.
The group of participating funds had 356,137 active members and 36,705 pensioners. This is an increase of nearly 150,000 persons and is due to the membership of a new sector fund.
Contributions of employers and employees amounted to e417m. This is a strong decrease of 16% from the 1999 figure. It shows the impact of the splendid returns of recent years. Companies could lower their contributions, which is of course very positive from a point of view of costs and competitiveness.
Equity proportion hit by stockmarket results
Equities represent almost half (49.9%) of total assets. This is slightly less than in 1999 (53%). On the other hand, the weighting of bonds has increased from 33% to 40.3%. This result is due to the good performances of the bond markets and negative returns on the stock markets, rather than to a switch in investment strategy.
With respect to investment instruments used by the pension funds, this year’s survey showed that no less than 66% of assets is invested in mutual funds. The ratio of direct investment in equity to investment in equity funds is 45/55, for bonds the ratio is 20/80. These figures illustrate the importance of the mutual fund instrument for the interest income of bonds.
Nearly 90% of bonds are invested in the Euro-zone which clearly makes it the ‘home market’ for bonds. For equities the average is 56%, varying from 74% for the smaller funds (less than e25m) to 53% for the largest funds (more than e125m). The larger funds diversify more out of the Euro-zone, especially towards the US, other European
countries and Japan.