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IPE special report May 2018

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Belgium: Second-pillar reforms back on the agenda

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Discussions about restricting access to the second-pillar defined-contribution scheme are under way, while the pension industry association has called for improved risk management

Regulation in summary

• Discussions have begun on Belgian second-pillar defined-contribution (DC) sector reforms with greater restrictions on access and to bring the pension age in line with state pension.
• The government is to explore developing annuities market for DC sector to stop exhausting of DC funds and additional reliance on first pillar schemes.
• The equalisation of second pillar benefit rights between blue collar and white collar begins this year.
• Belgian pension funds have doubled investment return to over 11%, the industry association has called for additional risk management.

Pensions reform is back on the agenda following the appointment of a new federal cabinet in October 2014 under the premier, Charles Michel.

Discussions began in 2015 regarding changes to the second-pillar hybrid defined contribution (DC) system. DC members can currently access their lump sums at age 60. However, after a glut of members exhausting savings within five years and becoming fully reliant on the state pension, the government is considering action. An obvious consideration is to limit access to additional savings until the state pension age, currently 65.

Alongside this, tentative talks have also taken place on how to structure the DC at-retirement market. Currently, few products and systems are in place to allow members to convert lump-sum savings into a retirement income. Insurers remain reluctant to develop an annuity market like the one in the UK. Industry commentators suggest there is little competition between those currently operating in the market, and the current low-interest-rate environment makes it unappealing for savers.

Belgium Country Facts

In addition to restricting access to DC savings, the Belgian government has indicated that it wants to harmonise overall second-pillar and first-pillar retirement ages, as recommended by the Organisation for Economic Cooperation and Development (OECD). The government is keen on raising the minimum age for additional pensions from 60 to 63 by 2018, with the state pension age set to rise to 67 by 2030.

These potential changes in the second-pillar DC system come in addition to the equalisation of employment rights for blue and white-collar workers. Second-pillar pensions are classed as an employment benefit in Belgium, meaning both defined benefit (DB) and DC offerings to white-collar employees must also be offered to blue-collar staff. In some of the industry-wide DC arrangements, contribution disparity between the two systems can reach as high as 13% of salary. By 2025 this must end.

However, the law firm Linklaters has predicted that many employers would start to bear the cost of the reform from the start of this year, with an overall levelling down a likely outcome. Linklaters said many DB schemes would close. This is because between January this year and the deadline for equalisation, workers would have the right to object to a new or modified scheme and to stay with previous arrangements unless otherwise directed by an industry-level agreement. A grandfathering clause means that differences in occupational pension schemes will continue long after the cut-off date.

“A 2013 report suggested creating a French-style system where pensions are calculated on a points basis, which are built up throughout a career”

The Belgian government has also begun discussions around the equalisation of first and second pension rights for the public and private sector. The current pay-as-you-go system for the public sector has continued to grow, with private-sector benefits deemed unsustainable. To start with, the formula for calculating benefits will begin to change. One entitlement already agreed to be phased out is to allow civil servants to accrue benefits while at university, which grants them earlier retirement than their private-sector counterparts and higher a higher level of pension.

Overall, in 2014, the Belgian Association of Pension Institution (BAPI) said its members doubled their investment return compared with the previous year. Schemes on average gained 11.9% compared with 6.7% in 2013, based on figures from three-quarters of schemes.

Belgian retirement assets (€ ’000s)*

However, BAPI warned it was important that the sector remains vigilant, as persistently low interest rates will mean lower returns in the future. The association advised its members that high returning asset classes must go together with stronger risk management. 

BAPI has continued its campaign to reform the guaranteed legal minimum return on pension fund contributions. The organisation says the requirement should be fairer and more transparent, as well as easier to manage.

Further proposals from 2013 are still awaiting concrete groundwork. One was to create a second-pillar system for the many public-sector employees who do not enjoy supplementary pension benefits because they are not appointed civil servants. They have much lower benefits than their counterparts.

A 2013 report suggested creating a French-style system where pensions are calculated on a points basis, which are built up throughout a career. Critics argue that a points system would be very easy to steer but would retain the ‘acquired rights’ of the different categories within the workforce – such as civil servants, the judiciary, academia, private-sector employees the self-employed, and so on. 

The system would be run by administrative bodies, not politicians, which would decide the value of the points on the basis of actuarial, financial and other assumptions.

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