Top 1000: Belgium - Plenty more to do
Belgian lawmakers face an uphill struggle to fix a pension system that has become increasingly unequal over the years. The most significant disparities include the different treatment of white-collar workers compared to blue-collar ones and the much higher benefits for civil servants.
In recent years, Belgium has suffered a number of political crises that are partly responsible for the lack of momentum of pension reform. However, in July this year the Flemish political parties that won the May election – the New Flemish Alliance (N-VA), the Christian Democratic and Flemish (CD&V) and the Open Flemish Liberals and Democrats (Open VLD) – agreed to form a government, which may include French-speaking party Mouvement Réformateur. This happened earlier than it was hoped and much earlier than the 541 days it took to form the last government in 2011.
The news gave relief to the Belgian people and was welcomed by rating agencies. However, much-needed pension reforms were not at the centre of the election debate. As a result, most experts believe that Belgium is still a long way from having a fair and modern pension system, even though the previous government undertook some steps to rectify pension inequality.
Following a 2011 constitutional court ruling, a legal framework was established in May 2013 to phase out the pension disparity between white-collar and blue-collar employees. Employers have until 1 January 2025 to harmonise pensions following discussions between social partners.
The law firm Linklaters notes that employers will have to bear the cost of the reform, a likely result being that many defined benefit (DB) schemes will be closed. This could happen because when a scheme is modified or replaced after 1 January 2015, but before the cut-off date for purposes of harmonisation between the two types of employees, workers will have the right to object to participating in the new or modified scheme and to stay with the old scheme, unless instructed otherwise by an industry-level agreement. The firm adds that this grandfathering clause means that differences in occupational pension schemes will continue long after the cut-off date.
Regulation in summary
• Differences in pension benefits between white-collar and blue-collar workers will be gradually removed following the establishment of a legal framework.
• Harmonising the system will be costly for employers and result in the closure of many defined benefit funds.
• An expert report outlines proposals to make pension taxation more progressive and create a second pillar for those public-sector employees who have no benefits.
• The panel also proposed the introduction of a points system similar to that used in France.
As well as overseeing the initial phase of this harmonisation process, the new government may decide to implement the recommendations put forward by the Pension Reform Commission 2020-40, a panel of 12 experts appointed by the previous government to propose solutions to the country’s pension problem.
The commission has compiled an 800-page report detailing the issues affecting pension savings, which makes a number of proposals to fix the system. One proposal is to make the pension tax regime more progressive. At the moment, there is a flat tax rate of 16.5% on the lump sum taken out retirement, unless the employee opts for early retirement, in which case the tax rate is 20%.
Another proposal is 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 and have different contractual conditions. These employees have much lower benefits than their appointed counterparts.
However, commentators note that the recommendations made by the panel are weak. Karel Stroobants, an independent pension fund expert, believes the panel addressed the symptoms and not the causes of the problems. He says: “The panel missed an opportunity to do some more fundamental work. They suggested some improvements to make the system more transparent, but fundamentally they did not advise a drastic correction of the system. They addressed the symptoms.”
Chris Verhaegen, member and former chair of the Occupational Pensions Stakeholders Group at European Insurance and Occupational Pensions Authority, thinks the report is too limited in its ambition and believes pension conditions should be made more stringent to ensure the system is more affordable and sustainable. “To my mind, the panel missed a chance to propose that civil servants’ pensions be brought to a level that is similar to private-sector employees and self-employed workers, although this is politically very difficult to achieve yet would be a genuine structural change,” she says.
One of the biggest criticisms of the commission’s report is the proposal to adopt a framework similar to the French system, whereby pensions are calculated on the basis of points acquired through an employee’s career. Critics argue that a points system would be very easy to steer yet keeping ‘acquired rights’ of the different categories within the workforce (such as civil servants, judiciary, academia, private-sector employed and the self-employed, and so on). The system would be governed by administrative bodies, not the politicians, who would decide the value of the points on the basis of actuarial, financial and other assumptions.
Verhaegen notes: “From the policymakers’ point of view this is very attractive, because with the points system the government would not have to announce changes that end up in lower pension benefits for a number of categories. The administrative body responsible for managing the points system would not take points from people; it would just change the value of them, in order to adapt the system to keep it sustainable. One should not forget that the upshot of this exercise is a budgetary one.”
Another criticism of the report is that it does not contain specific proposals to force people to retire later. The previous government raised the legal retirement age to 65, with a gradual increase meaning that people will still be able to retire at 62 in 2016. Early retirement will still be possible under many exceptions to the rule and although lawmakers have created some disincentives to retire early, these are unlikely to dissuade many people.