Sector funds were introduced at the beginning of 2004 following the enactment of the Vandenbroucke Law to broaden membership of second pillar schemes. While this aim is well on the way to being achieved other challenges remain.
When the law became effective, some sectors already had in place a Fonds de Securité d’Existance (FSE) which took care of sickness, holiday and unemployment benefit, among other things. These sectors used this ready-made infrastructure to add on a pension fund.
Sector pension schemes can charge up to 5% of the pension contribution to cover their operational costs. But that is 5% of a contribution which is still very small, averaging around 1% of salary. “The reason we can cover costs is because they are spread over both the pension scheme and the FSE,” says Johan van Buylen, director of the electricians’ fund, and member of the newly established Forum of Sector Pension Schemes which was recently created within the Association of Sectoral Institutions (VSI/AIS), of which he is president. “Without the FSE this would be impossible in our sector.”
Sector pension schemes have typically placed their arrangements with insurance companies for the first five years of operation because the expertise was not yet available. Those without the FSE infrastructure have to outsource everything, even the data-collection.
There are major concerns regarding data accuracy and completeness and the flow of contributions. “This is a big issue for sector funds,” says Van Buylen. “It is much easier on a company level.”
The electricians fund is an example of a fund that does have access to an FSE. With a view to promote the development of the sector funds project, Van Buylen had the idea to use his infrastructure to collect and clean data on behalf of the two branches of his sector that did not have the infrastructure and deliver it to the insurance company.
While he has direct access to the data regarding members of the electricians’ fund, the task of cleaning data for the other funds would be more challenging – to put it mildly. So while Van Buylen could take on this challenge if requested he is not seeking it as a commercial opportunity.
The sheer numbers give some idea of the challenge. In the electricians sector for example there are 25,000 workers and 5,000 companies.
Individual employers submit their declarations and the money to the central social security organization (National Office for Social Security) which are then transferred to the ‘Banque Carrefour’. Van Buylen’s organisation then extracts the information it needs from there.
“The data is not always reliable and it is not always complete,” he says. “The problem is allocating the information for each individual because there is so much data.”
The employers use the ‘Sécrétariats Sociaux’ which were set up after the war to help small companies with the administration of contributions and data.
The issue of data completeness relates to the fact that members have to be informed of their pension rights when they leave the sector. “One of the problems is how to locate everyone who leaves the sector,” notes Van Buylen. “This is a priority in the debate. In the electricians fund there are 4,000 per year who move.”
Fortunately most sectors do not have such a high turnover.
Part of the information is supplied by a system within the Banque Carrefour known as the DMFA. From 2003 every company in Belgium has had to declare electronically to the Banque Carrefour the wages and working time of its employees. “This was an enormous investment and resulted in a significant improvement in the data flow,” Van Buylen notes. “Although we were sceptical in the beginning, the system is working and improving rapidly and becoming a success.”
Companies in all sectors must also inform the Banque Carrefour when staff are hired or fired. This system is known as DIMONA. But there is a problem. “Only four sectors are forced to say which sector they are in,” Van Buylen explains. These are for the moment agriculture, temporary workers, hotel and construction.
“This should be extended to every sector,” Van Buylen stresses. “It has not been made universal so far because the government wants to take things slowly and not overload the people responsible for supplying the information. But it must be made universal because we cannot check every sector ourselves.”
In the absence of anything better, there are ways to guess the sector. “We look for employees where the employer has not declared any data for some time,” Van Buylen explains. “But then there is the possibility that the employee in question might be sick or unemployed – in other words maybe he has not left the sector.”
So why don’t companies disclose this information automatically? “Working in a given branch implies a certain size of contribution,” Van Buylen explains. “For example, the electricians fund has two different rates; disclosure of the sector could show up a mistake.”
He adds: “We think the obligation to inform which sector the employee has just left can be extended to every sector because the Sécrétariats Sociaux will make very few mistakes. But the risks are minimal – if we discover a mistake we can correct it, so the impact will not be so bad.”
The other issue is reliability. One problem is identifying the periods of sickness, holiday and unemployment when there are no contributions. “In order to do this we need the data to be 100% accurate,” says Van Buylen. “But currently the employer only has to give an indication of sickness and periods of unemployment, so this is not reliable data.”
Completeness of data feeds through to completeness of contributions. “We only have to hope that the government gets all the contributions,” says Van Buylen. “But there are often shortfalls as a result of bankruptcies and start-ups. Under company law the first creditor is the social security but on average we lose around 3% of the total.”
The social security authority chases up the non-payers but this only goes so far. In 2004 it announced that all debts before that time would have to be borne by the sector funds. “The yearly average loss for the electricians fund is €30,000,” Van Buylen says. “But we can manage that.”
The larger, longer established metal workers fund already has a debt collection function to deal with any companies that delay with their contributions.
The sector funds have to guarantee a return of 3.25%. Van Buylen notes: “We work with advances from government and have to guarantee the 3.25%. Shortfalls in the funding make it very difficult for us to provide this guarantee.”
The sector funds pay 5% of every pension contribution into a solidarity fund. “I personally think we should use the solidarity fund to finance the shortfall,” says Van Buylen. “But the unions of course have a good argument that this is workers’ money – why should good employers pay for bad ones?”
Given the obligation to guarantee the benefits there is a need to make operations more professional. “The metalworkers are big; they already had professionals and they have set up a pension fund, so they already have a tradition of talking about investments,” Van Buylen explains. “The sector funds should discuss this too otherwise they will always turn to insurance companies.”
The main concern is the decision which sector funds must make after the five year period. “Will sectors learn to stand or will they remain in the hands of an insurance company?” Van Buylen asks. “Insurance companies want to attract as many sector funds as possible. They are discussing how to create insurance vehicles that are best adapted to the needs of the sector funds. The government discussed this with the regulator and the insurance companies but the customer was not involved.”
He adds: “I hope there will be real debate among sector funds this year, but it is likely that after five years they will continue with an insurance company. The sector funds have to build up expertise in order to guarantee the 3.25%. But they are limited by the costs they can bear as a result of the restrictions on the amount they can charge.”
The good news is that the contributions are increasing. In the case of the electricians the contribution has increased from 1% to 1.36%. “This shows that the social partners are convinced that sector funds are working,” says Van Buylen. “Slowly other funds are moving ahead too.”
He adds “We have learned a lot though trial and error. Things are slowly coming good which is positive.”
So how best to encourage debate? In the legislation on supplementary pensions the government has created a commission for supplementary pensions which includes the employers and unions.