Making virtue of necessity
After the Second World War, Belgium developed a broad social security system that differentiated between different kinds of profession. Different schemes were set up for employees, the self-employed and civil servants.
The decree of 28 December 1944 provided the populace with legally regulated and guaranteed protection, funded by contributions from employees, employers, self-employed workers and the government.
Ten years later, the government replaced the existing funded pension scheme with a pay-as-you-go scheme. Since contributions shadowed wage trends, this system was more easily able to ensure the maintenance of purchasing power.
Social security contributions are calculated on the basis of the employee’s full pay. Payments, however, are based on a capped wage. As a result, a significant degree of solidarity between high and low earners is built into the system.
Men and women are eligible for a pension from the age of 65 (64 for women until 31 December 2008 ), after a career lasting at least 35 years.
The retirement pension for employees is calculated on the basis of the wage earned during the career and the duration of the career. The career consists of the actual years worked, as well as periods of inactivity treated as years worked (including periods of unemployment and incapacity for work due to illness or invalidity).
In addition, the replacement ratio for a family pension is 75% of the wage, while it is 60% for a single-person pension. Spouses who are both entitled to a pension can opt for two single-person pensions if that is more advantageous than one family pension.
Calculating the retirement pension takes account of the wage cap, which is index-linked annual and reassessed every two years in line with the real increase in wage costs. For 2005, the wage cap was €43,314.93.
The survivor’s pension is 80% of the family retirement pension of the deceased.
To calculate retirement and survivor’s pensions for the self-employed, the same approach is taken as for employees, except that in this case the wage cap is €45,664.62 (in 2005).
Consequently, we will only discuss the employee pension below.
Due to the wage cap and frequently insufficient working careers (part-time work, longer periods of study, etc.) the average actual retirement pension paid out for a single unmarried man is €862 per month; for a single woman it is €631. The state pension makes it possible to have the bare essentials, but it does not always make it possible to have what is necessary, much less the extras that make life more pleasant.
The maximum pension payment for single male employees is €1,602.38; for single female employees it is €1,622.43. There is a big difference between the theoretical maximum retirement pensions and the retirement pensions actually paid out! That is one reason for the employee to provide for an additional income to supplement the state pension.
If, in addition, the gap between the state pension and the wage earned during the career grows, it will become increasingly socially acceptable for companies to set up supplementary schemes for their employees, thereby building up a company pension that corresponds to the wage and duration of work performed. It also makes sense to first involve those whose wage already exceeds the wage cap.
Another aim is to provide a more solid foundation for the state pension. The ‘Zilverfonds’ (Silver Fund), which is supposed to gradually build up a demographic reserve, constitutes a structural innovation in the first pillar. The fund receives money from non-fiscal income, for instance from the sale of government assets, one-off receipts such as the income from banknotes which were not exchanged after the transition to the euro, income from privatisations and budget surpluses.
In addition, the WAP (law on supplementary pensions, date 28 April 2003) makes access to the second pillar more flexible, especially for workers and SMEs.
In 2004, Belgium had 245 authorised pension funds. In that same year, Belgium had 59 insurance companies that were authorised to offer group insurance schemes; 15 insurers were allowed to manage funds.
To date, the second pillar has mainly consisted of company pension schemes. The National Social Security Office statistics show that there were 2.4m employees in 2004. It is estimated that approximately 50% of Belgian employees are able to enjoy the benefit of supplementary pension schemes. The government hopes this will grow to 75% within three to five years via the WAP.
The amount of payments made in 2004 (€3.89bn) remains limited, with respect to the payments for state pensions (about €14.00bn in 2004). Payments made by supplementary pensions have grown to around 28% of state pensions, accounting for more than one fourth of total pension income. Contributions (€5.02bn) made by employees and employers in 2004 are exceeding payments: supplementary pension schemes are clearly growing.
Although the sectoral schemes have not been explicitly regulated, this has not prevented a number of initiatives from being taken in that respect too, for instance by the construction sector, the oil industry, inland navigation, notaries and elsewhere. With the WAP as a foundation, new sectoral schemes have also been launched, each of which represents a large number of members (electricians, metal trade and manufacturers, non-ferrous metals, etc).
Pension funds and group insurers are part of a country’s group of institutional investors. As mentioned above, their total reserves are more than €40bn, corresponding to 15.16% of GDP. The annual savings efforts total nearly €5bn, or around 13.6% of the Belgian yearly savings.
Investments by second pillar managers are made in a country’s real economy, ie, in its businesses. Group insurance gives the construction sector a massive injection via the financing of mortgages for private homes. Pension funds focus - more so than group insurers - on investing in shares.
The more conventional supplementary pension schemes provided for a pension payment (with the option of conversion into capital, which is still the preferences of Belgian pensioners), calculated in accordance with pay and career on a defined benefit basis with the investments able to count on an income guaranteed by the insurer.
For various reasons, including cost-saving measures by employers, attractive stock markets and so on, systems with fixed regular contributions on a defined contributions basis are enjoying increasing success.
All players - the government in particular - are hoping that supplementary pensions will really make a breakthrough, something for which the WAP has laid the foundation.
Rene Dhondt is general manager of Assuralia, an association of insurers in Belgium