Belgium
compiled by Allianz Global Investors
Pension System Design
The pension system in Belgium consists of three pillars. A pay-as-you-go financed public pension system exists alongside voluntary occupational and private pension schemes.
With an aging population set to put mounting pressure on the budget in the decades ahead, the Belgian government initiated a series of pension reforms already in 1997. The reforms included the raising of the retirement age for women, the tightening of conditions for early retirement and measures to reduce the benefit level. Reforms to the first pillar were followed by a new legal framework for occupational pension schemes, which was implemented at the beginning of 2004. The ‘Vandenbroucke Law' aimed at strengthening the second pillar.
In order to cushion the budgetary challenges posed by the anticipated rapid aging of Belgian society between 2010 and 2030, the Belgian government established the ‘Fund for population aging (Fonds de vieillissement) in 2000. Pension expenditures are expected to account for 13.4% of GDP in 2050. The fund is financed by privatisation proceeds and, where possible surpluses in the social security system as well as parts of the budget surpluses. At the end of 2007 the fund had accumulated assets of approximately EUR 15.5 billion.
Belgium has a relatively small pension market dominated by insurance products. The market is expected to grow at an average annual rate of 6.2% to EUR 409 billion assets under management.
Public Pensions
In Belgium, wage earners, self-employed and civil servants are compulsorily insured under the statutory pension scheme. Contributions amount to 7.5% for employees and 8.86% pays the employer. Benefits are income-related, although the Belgian state grants a minimum income for elderly people.
The pension income depends on preceding earnings, current income level and marital status. There is a maximum and a minimum pension: the maximum benefit equals 60% of pensionable income (adjusted career average earnings) for singles and 75% for married persons. A minimum pension is guaranteed for every year in which a worker was employed for at least one-third of the year and paid contributions to the pension system. Furthermore there is a means-tested "minimum guaranteed income for elderly people" which can be obtained by every person older than 65 whose pension and other income are below a certain threshold. In order to qualify for a full pension the individual has to have a contribution record of 45 years at the age of 65. Benefits are indexed to changes in the consumer price index.
Occupational Pensions
The legal framework for occupational pension schemes implemented by the "Vandenbroucke Law" has now been in place since 2004. In January 2007 all pension schemes had to comply with rules stipulated by the new legal framework. The aim of that legislation was to strengthen the second pillar of pension provision. It relies heavily on the concept of industry-wide pension schemes.
Industry-wide pensions schemes can be established as a result of collective bargaining between employer associations and the trade unions. Each industry can have just one pension scheme, e.g. a pension fund or insurance scheme, set up by the employer association and the trade union. Employers are obliged to join these schemes unless the collective agreement allows them to contract out. However, this is only possible if the employer offers a company scheme providing benefits equivalent to the level of the industry scheme. The collective agreement thus sets minimum standards for each sector, creating a highly competitive and professional pension market.
Accordingly, so-called social plans can be set up, either as an industry-wide pension scheme or as a pension plan of an individual company. Contrary to other pension schemes, they have to offer benefits for risks such as death or disability but receive special tax advantages in exchange - e.g. the 4.4% insurance tax that will be imposed on contributions to other pension plans will not apply.
Since 2004 defined contribution have to provide a minimum guarantee (3.75% for employee contributions and 3.25% for employer contributions) that has to be achieved over the lifetime of the individual member. In industries with a high fluctuation of workers this comes down to an annual guarantee. If the employee terminates employment and transfers the accrued entitlement to another fund/employer, the company has to fulfil the guarantee and bridge the gap immediately in the event of any deficit.
Contribution rates to occupational pension plans are usually laid down in the plan rules. Most plans are predominantly employer financed with contribution rates usually ranging from 0.5% to 1% for employees with income below the social security ceiling and 4% to 5% for incomes above that ceiling. Benefits can be paid out as annuities or as lump sum payments.
Collective pension schemes are funded by either group insurance policies or pension funds. The "Vandenbroucke" Law has severely restricted internal funding via book reserves.
1. Occupational pension funds
Pension funds in Belgium may operate either in the form of a foundation or a mutual insurance association The appointment of an investment manager and custodian is not legally required but is increasingly becoming market practice.
Tax treatment of contributions and benefits
Employer contributions are tax-deductible and are not deemed to be part of the employees' taxable income. However, the tax-deductibility is linked to the condition that the expected sum of statutory and supplementary pension does not exceed 80% of gross annual wages. Employee contributions are subject a 4.4% tax, but this usually offset by a tax-credit applicable to those contributions.
Income tax is paid on the benefit received in retirement. However, if the benefit is paid as a lump sum the benefits is subject to a flat-rate tax. If the benefit is paid as an annuity, the pension is taxed as normal income but the effective tax is lowered by a special tax credit for retirees.
Investment of pension funds
The fact that Belgium basically applies the Prudent Person Principle, with some quantitative limits that are mainly diversification requirements, clearly favours asset managers. As long as the Prudent Person Principle is complied with, there are no restrictions upon asset managers.
In October 2006 the Belgian parliament approved new legislation on the taxation of pension fund assets and adopted the IORP Directive (EU Directive 2003/41/CE on the activity and supervision of institutions for occupational retirement provision) into domestic legislation. Both took effect on January 1, 2007. In 2007 a 0.17% tax imposed on pension fund asset was removed with the introduction of the so-called "Organisations for Financing Pensions (OFP)". The new legal framework for pension funds is obligatory and existing funds have to adopt the new OFP structure until 2012. In contrast to flexible operation rules the new legislation sets out strict requirements regarding reporting procedures and prudential supervision by the Belgian Finance Banking and Insurance Commission.
In the course of the implementation of the IORP Directive Belgium intended to create a framework that would be attractive for cross-border corporate or multinational schemes, allowing them to operate in and from the country and thus attract foreign capital. Following the example of Luxembourg and Ireland, Belgium enters the competition as a destination for multinationals.
2. Group insurance schemes
Group insurance schemes dominate the occupational pension landscape in Belgium, with around 70% the majority of pension plan members are covered under an insurance contract.
Tax treatment of contributions and benefits
The treatment of contributions and benefits of group insurances is basically the same as for pension funds.
Investment of group insurances
Traditional insurance contracts are funded from allocated reserves and benefit from a minimum guaranteed return that is fixed by law. On top of the guaranteed return insurance companies grant the opportunity for profit participation every year. The reserves are invested in the general investment portfolio of the insurance company, with the effect that the insurance company decides solely on the investment policy.
However, there are also insurance products that do not offer such a minimum guaranteed return. In this case the assets can be invested in specific funds managed by the insurer. For large group insurance contracts the insurance company may separate the employer's pension assets completely from the mainstream insurance investment portfolio and offer a bespoke investment fund instead.
3. Individual pension plans
Traditionally, individual pension plans provided instant pension benefits to company executives at the time of retirement, with no prior history of contributions being made by the employee.
The use of individual pension plans was restricted by the "Vandenbroucke Law" but may be continued provided that it serves as a supplement to an existing pension savings plan that covers all employees of a company. More clearly, individual pension plans are allowed if there is a company pension scheme in force that is applicable to the entire staff.
The pension promise must be externally funded.
Tax treatment of contributions and benefits
Annual contributions are limited to a certain amount and are tax-deductible.
Outlook
Like many countries in Western Europe, Belgium has been trying to encourage occupational pension provision, particularly in the form of sectoral schemes. Certainly, these schemes need time to develop. However, initial acceptance of the schemes has been encouraging, even if coverage aims have not yet been achieved. While establishing a pension reserve fund in Belgium can certainly increase the sustainability of the public system, the restriction to invest only in Belgian government bonds significantly limits its advantages. Given the exceptional burdens of aging on Belgian public finances, it is likely that the reform process will continue.