Investment policies imposed on pension insurers by the government are one reason employer-sponsored pensions in Belgium face deficits in meeting their mandatory minimum guaranteed return on pension reserves. Employers are also finding that fixed income solutions are not beating inflation, creating a loss in purchasing power. Even more significant problems may occur because the government set a fictitious maximum cost structure of 5% when many pension schemes in Belgium charge more than 5% to manage the plan. The result of this vicious cycle (high cost structures and low returns) is that pension schemes may become underfunded, and employers will need to make up the difference.
Historical Background and Context
Supplementary pension plans (often referred to as second pillar pensions) must be run by a pension institution formally agreed to by the employer. An insurance company (group insurance) or a pension fund receives the contributions. Read the Regulation of State and Supplementary Pension Schemes in Belgium article by Thompson Reuters for further background on pensions in Belgium.
Under Belgium’s Workplace Pensions Act (WPA), employers must provide a minimum return on premiums paid in a fixed-contribution or cash-balance group insurance policy. For example, from 2004-2016, the minimum return on employers’ contributions was 3.25% and 3.75% for employees. After 2016 the minimum return was set to 1.75%.
Since 2017, 0% interest has been guaranteed on new policies and premiums paid from 2017 onwards (excluding profit-sharing). Since 2019, the profit share has been allocated based on the average interest rate calculated on the individual policy. For 2020, the overall gross yield was 0.75%, and for 2021, it was 0.50%.
Trends in Choosing Investment Types
There are three investment types for employer-sponsored pensions:
- Group Insurance Branch 21 is a safe option (73% bonds, 6% equities, 2% real estate, and 19% other) but offers a low guaranteed return on older reserves anywhere from 1%-4.75%. Today almost no insurance companies achieve the minimum return of 1.75%, resulting in an underfunded pension.
- Branch 23 has a diversified approach, and the return depends on the portfolio. Many employers are switching to this branch because it has a potential higher return than 1.75%. It is riskier because there is no capital guarantee.
- A mix of branches 21 and 32 is the third option. It is also diversified and is made up of bonds (52%), Equities (36%), real estate (2%), and 10% other. The average return is 5.18% (15 years) and 4.13% (20 years).
Over the last two years, larger multinational employers have switched to Branch 23 or a mix of the two. However, it will be a matter of time before small and medium-sized employers begin to change as well, according to Van Dessel, Asinta’s employee benefits consulting Partner in Belgium.
Employer-sponsored pensions in Belgium are complex, so having advisors with in-depth knowledge of the local market and compliance is essential. In addition, employers should thoroughly understand their pension’s administrative costs and rate structure to ensure their pension’s solvency.
For support in understanding the deficits your employer-sponsored pension in Belgium may be facing, contact Asinta, and we will connect you with VanDessel, Asinta’s employee benefits consulting Partner in Belgium. You can also review Van Dessel’s employee benefits solutions brochure (in English) to learn more about benefits in Belgium.