Activity across a broad front
In two years’ time the status of Belgium’s self-employed as the poor relations of state pension provision should be a thing of the past. This is one of a number of challenging projects that have been exercising the powers that be in Belgium.
The idea was that the self employed who get the lowest legal social security should have a layer of additional provision on top, known as first pillar ‘bis’. The idea was originally put forward when the government was created in 2003.
“The self employed don’t like to pay for their own pensions – they regard it as a tax,” says Henk Becquaert, special representative at Belgium’s pensions regulator, the Banking, Finance and Insurance Commission. “They believe their pension should be paid in full by the state.”
In this new system individuals will have a choice of pension provider. The contribution will be set initially at 1% of income; this will be paid to an individual account. The individual will be able to chose between insurance companies and pension funds that are specialised in providing for the self employed. “Discussions in government are in the final stages and if it goes well the details of the law should be agreed by June,” says Becquaert.
The challenge is that the self employed can chose where to put their money. “So our challenge is to control these institutions,” he continues. “If it is a simple account with no guarantees then the controls will be minimal but if there are guarantees we will have to have solvency rules and we will have to control the solvency margins strictly. I think there will be some kind of guarantee and I think it will be a kind of cash balance system.”
Becquaert believes that the new funds will be established from 2008. “It will be good for the politicians if the new system starts just after the elections,” he says.
Also attracting interest at the moment is the government’s nationalisation of pension assets. The nationalisation of the Belgacom pension fund in 2002 has been followed more recently by the takeover the SNCB – Belgian Railway – fund and that of the ports of Belgium. These are smaller funds – under €1bn – although Becquaert stresses that these are all first pillar funds.
This policy continues to attract much criticism – firstly that it was a bad signal to send to the institutional market and also the government was accused of taking the assets to plug the budget deficit.
“Of course the budget deficit is an element of the government’s reasoning for this policy,” Becquaert notes. “But the main reason was to take over pension liabilities of civil servants which have the highest first pillar pensions in Belgium. For these companies the pension fund makes them uncompetitive with other companies and countries. Companies are asking us to take over their liabilities. There are no more big funds in the government’s sights but there will be other public sector funds that whose liabilities the government will take over.”
Becquaert agrees that this policy is expensive for government. He explains that the government has provided for the future demographic shock by way of a so-called Silver Fund. “It has planned for budget surpluses from 2008. These will be paid into the fund and this will then be used to pay for the liabilities and the demographic shock. “We take the assets to plug the deficit and use any surplus for the Silver Fund,” he explains.
Becquaert stresses that the Silver Fund is set aside only for that purpose. “I hope that politicians can restrain themselves,” Becquaert says. “There are a lot of different demands on government finances but this money must be used to plug the pensions gap. That will be a big issue for this and future governments.”
In order to improve the long term viability of the state pension system the government has negotiated a so-called generational pact. The age at which early retirement is possible will be increased from 58 to 60. “Early retirement has not been abolished but the rules have been made much stricter,” says Becquaert. This is the first step.
The proposed new rules also state that people need longer careers to qualify for a pension. Currently most people have to work at least 38 years but some have the opportunity to take early retirement after 32 years; the proposal is that all people should work a minimum of 40 years to earn the privilege.
The government also aims to provide some fiscal advantage for people who work longer. “As it stands companies benefit from getting rid of older workers because the younger workers that they replace them with are cheaper,” Becquaert explains. “The government aims to introduce incentives to employers to make older people more competitive. For example if they work longer the pension contribution is reduced.”
Companies agree that the retirement age should be raised. “But they are slow to implement changes while older workers remain more expensive than younger ones,” says Becquaert. “There is also resistance at union level. They didn’t agree with the generation pact stating that we should not oblige people to work longer, and that if the older people work longer younger people won’t find work. They also say that we should not take harsh measures against employers because employers will take people on again when they need to.”
The government decided not to publish figures regarding what the plans would save because, as Becquaert says, “it didn’t want to shock the unions. It was only a budgetary exercise”
The new rules are expected to come into force in “this year, with a transition period lasting until the end of this decade.”
Then there is the issue of the new sector funds which are largely a product of the Vandenbroucke Law of 2004. The issue of accurate, complete and timely flow of information is key. Becquaert considers the options: “funds can organise everything themselves and liaise directly with their member companies for the data. But this is a major cost burden. It is cheaper to use the Banque Carrefour which provide all the information in an integrated form.”
A plan has been put forward to collect and improve this data centrally by John van Buylen, who runs the electricians sector fund. Becquaert comments on this: “He gives the benefits under certain criteria but the information is not available in that form. Sectors have to create a pension plan based on the available data. Otherwise they are reinventing hot water – and that makes life difficult.”
The limited availability of data has its origins. Becquaert explains that “around 15 years ago the information requirements were rationalised so as not to pressure employers too much. Before rationalisation there were 10 ways to calculate salary. Now there is one and this is much easier to administer. We ask sectors to use rationalised data and not to invent new conditions which create costs.”
There have been problems in terms of shortfalls. Bankruptcies are a big problem. “Companies about to go bust may be obliged through contract to pay the contribution until bankruptcy is declared,” says Becquaert. But many of them don’t, so there is always a gap. We don’t have a solution for that. This is a structural problem: we can’t legislate against companies going bankrupt.”
As part of its implementation of the European directive the government has introduced a bill for new law for the prudent control of pension funds. “This is now in the hands of senior government,” says Becquaert; “we expect that in a few months the new law will be passed.”
One major focus is the corporate governance of pension funds. Currently the legislation covers a number of areas of governance but the new law will address the issue more completely, dealing with internal controls and compliance, for example. The law will be less strict for smaller funds given that they do not have the resources of larger funds to pursue an active corporate governance policy. This will be in place by the end of the year.
The prudent control law also does away with the ruling for members of pay-as-you-go company funds which stated that the pension should be funded for people who were hired after 1985. “Now this has been scrapped and the whole has to be funded for the working period after 2007,” says Becquaert.
He adds: “This will allow us to monitor the funding position of the pension fund so that we can intervene earlier and more easily. In the past we only reacted if a scheme was underfunded; now we can simply select funds where the funding position has deteriorated and ask them to explain. The new law gives us the power to put forward measures to tackle this risk.”
Timing is favourable. Becquaert notes: “It is good to introduce the changes now that the funds are having good times.”
But he adds that we must be patient. “In Belgium we have to deal with pension issues step by step; the government consists of at least four parties so we can’t proceed as quickly as the UK for example.”