Peter De Keyzer, Chief Economist at BNP Paribas Fortis, analyses the strengths and weaknesses of the Pension Report.
The Pension Commission, set up by outgoing Ministers De Croo of Pensions and Laruelle of Self-Employed, presented its Pension Report shortly after the elections. The broad lines of the report: working longer yields a higher pension, and that pension is calculated on the basis of a points system. You earn a pension point if you earn as much as another employee, official or self-employed person earns in one year. If you earn less, or do not work full-time for a whole year, you get less than a full point. If you work or earn more, you get a little more. One point corresponds to a specific amount. The points system would allow for variations, e.g. for heavy and arduous professions and periods of sickness or unemployment. Everyone can see, year on year, how many points he or she has accumulated.
If you want to take early retirement you have to have worked for 42 years. Part-time retirement and part-time work is also an option. A notable point: the three regimes (employees, officials and self-employed) continue to exist but are growing towards each other. Another notable point is that part of the margin for wage increases would have to be diverted to the second pillar until that contribution amounts to 3% of the salary.
It is up to the new government to implement that plan. This will be a major challenge: it will have to be determined how much a pension point is worth and how much it will yield to work a year longer. What, according to Peter De Keyzer, are the pros and cons of the report?
- It was a good idea to postpone the report until after the elections. There is now time and opportunity to study the proposals in-depth and to discuss them.
- The points system will restore the link between length of service and a pension in later life. The system is also more transparent: you know, year on year, how many points you have accumulated. Given that the points system will be introduced for the three regimes, they will be better comparable and can gradually converge.
- The report will instil in people the awareness that the pension pot is not an inexhaustible supply of money but that everyone has to contribute to it. The message is also that this is a radical reform that requires everyone to make sacrifices.
- The report is too non-committal about the link between retirement age and life expectancy. The latter continues to increase, and in 20 years' time we will live 6 years longer on average.
- There is less focus on the importance of creating jobs. The more people in employment, the higher the pensions that can be paid.
- Not only will the second pillar be taxed more heavily, but also more progressively. Those with higher incomes already pay relatively more tax through progressive taxation and their pension is capped, irrespective of how much they pay in contributions. To progressively tax the second pillar as well would be excessive.
Pensions in the public and social-profit sectors
How much pressure is the Belgian pension system exposed to? And what does this mean for the retirement provision of those currently employed in the public or social-profit sector?
The first pillar: the problem child
In Belgium, statutory pension is accrued by means of a distribution system: the working population pays for the pension of people who are now retired. They do this through social security contributions from their gross salary.
That system has been under pressure for some time. There are several reasons for this. First, the number of working people is declining. Today there are 4 working people for 1 retired person. In 2020 that will be 3 working people for 1 retired person and in 2040 no more than 2 for 1. Belgians are retiring too early. The official retirement age is 65, but in our country not so many people over the age of 55 are still working. However, their number is rising. In 2000 only 10% of people over 55 were working, today it is already 40%. On average we are continuing to work until age 57. The European average is 61 years and in the Scandinavian countries most people work until the age of 65.
The number of retired people is increasing. Between 2007 and 2011, for example, the number of pension beneficiaries rose by almost a quarter. The reason is demographic: between now and 2030, the baby boomers (the generation born in the first decades after the war) will retire en masse. After 1965 the birth rate began to fall sharply. This means it is increasingly difficult to replace the outflow of working people with new entrants in the workforce.
Everyone will have to contribute
The retirement age used to be 65. The average life expectancy was also about 65 years. Today most people live longer. It may be good news for us, but not such good news for our pension capital. All this means that increasingly more pensions will have to be paid by increasingly fewer people.
There is no "golden bullet" solution for this problem, says Luc Zuallaert, Director of Public Banking at BNP Paribas Fortis:
"The government is strapped for cash. Because of the financial crisis and the subsequent economic recession, the public debt increased again and tax income fell. Increasing taxes to augment pension capital? Belgium already has a high tax burden, so this will be difficult. The problem has dragged on for too long. I am in my fifties, and twenty years ago my employers told me that there would no longer be a statutory pension for my generation.
In the meantime the problem has become so urgent that we will have to make decisions very soon. The Pension Commission's recent report has again made that all too clear. We will have to reform the system on various fronts, and with the greatest haste: we will have to work longer and the proceeds of the second pillar may have to be taxed more heavily. It is clear that everyone will have to contribute."
A significant pension gap
One thing seems certain: pensions will no longer increase drastically - they are in fact set to decrease. And they are already not all too high today, at least not for everyone. Much depends on the system in which they worked.
This brings us full circle to pensions in the public and social-profit sectors. There is a pension gap in these sectors. Permanent staff have a remarkably high pension, while contract staff have to make do with a lower statutory pension. What's more, contract staff overestimate their so-called "replacement ratio", the pension expressed as a percentage of their last salary. Kristel Awouters (Product Development Pension Benefits at AG Insurance) has the figures:
"Eight in ten Belgians believe their statutory pension will be more than 1,000 euros a month. But this is only the case with 38% of the population. Today, the average employee pension is around 1,350 euros net. The replacement ratio is noticeably low in comparison with neighbouring countries. For someone with a salary of 40,000 euros this is around 42%.”
The higher the salary, the lower the replacement ratio. This is the result of the solidarity principle in the Belgian pension system: pension contributions are no longer capped (the more one earns, the more one contributes) but the pension benefits are (no matter how much you contribute, you will never get more than a certain amount of pension). Kristel Awouters:
"Above 52,000 euros gross a year one's salary no longer counts towards pension. The contributions are then in actual fact pure taxes."
Capped and uncapped
At an average of 75%, the replacement ratio of statutory officials' pensions is substantially higher than for employees' pensions. This is due to a difference in calculation: for employees the professional income is multiplied by the number of service years. That amount is divided by 45. A family head (retired with dependants) receives 75% of this amount, a single person (under the Pensions Act a married couple can count as two "single persons") receives 60% of that amount.
The pension of an official is traditionally considered as deferred pay. The reasoning behind this is that officials have a lower pay during their working career. In compensation, they receive a higher pension. Statutory pension is not calculated on the basis of professional income during the entire career. It is based on a reference salary corresponding to the average salary during the last ten years of an official's career. This is interesting, because the accumulated seniority means that these are usually the best paid years. Officials, of whom it is often said that they know their rights better than anyone else, apparently do not always know this after all. According to a survey in the weekly periodical Humo, they expect an average pension of 1,547 euros. In reality, it is 2,370 euros.
Five pools become one
In other words, in the current situation the statutory pension is more than adequate. The only problem is its affordability, but this is not something that worries the officials. However, it is an issue for the public sector. It is indeed the federal government that has to pay most of the statutory pensions.
Local authorities (provinces, cities and municipalities) are not faring any better. They have to pay the pensions of their permanent staff themselves. Until 2012, those that had not elected to outsource financing to an insurance company paid contributions into one of five pools: two consolidated pension funds of the National Social Security Office of the Provincial and Local Authorities (Pools 1 and 2), a welfare fund (Pool 3), their own fund (Pool 4) and a separate fund for the local police (Pool 5). In 2012 the five pools were merged into one consolidated pension fund. Kristel Awouters:
"The intention was for the pension costs to be distributed correctly so that the pension invoice of a local authority was partly determined by its own pension cost and appointment policy. In practice, the affiliated local authorities will pay a basic contribution of 41.5% of their permanent staff’s wage bill as from 2016. If the pension cost is higher than the basic contribution, local administrations must make up the difference by means of a so-called accountability contribution."
Outsourcing officials' pension
The increase of the pension contribution is a heavy financial burden for municipalities and provinces. But neither the regions nor the federal government are inclined to come to their aid. This situation is the most urgent for institutions that used to have many officials in their service, but now employ mainly contract staff. Some hospitals are currently in that situation. They pay little to no basic contribution because they have almost no officials anymore. But the National Social Security Office has to continue to pay the pensions of their retired officials. This means that those institutions have to pay a high accountability contribution. There is no escaping this: whether you discontinue employing officials or continue as before, you will always have to pay.
One freedom still remains for them: local authorities may opt for outsourcing the management of their officials' statutory pensions to an insurance company.
"At AG Insurance we offer pension solutions for the first pillar", explains Kristel Awouters. "In agreement with the public authority we put together a financing plan so that financing of the statutory pension cost is spread over time. Some municipalities have already made this transition. It offers benefits in terms of cost control and return."
The gap increases
Those working in the public or social-profit sector on a contract basis are rightly more concerned than officials. Earlier we mentioned the replacement ratio and the major differences between the two systems. These are vast, as shown by a study conducted at the university of Leuven. The higher the salary, the higher the pension gap. After an entire career a contractual cleaner, for example, receives 360 euros less per month than an official. In case of a nurse with a graduate nurse diploma the difference can amount to 847 euros and in case of an academic engineer, as much as 2,069 euros.
But we have to be honest: such differences cannot be bridged. However, they can be reduced – up to 80% of the last salary – by means of the second pension pillar. The second pillar is the supplementary pension accrued during one's professional activity. This is usually by means of group insurance or, to a lesser extent, through a pension fund. Employers and sometimes also employees deposit a percentage of the salary into this fund. The invested capital becomes available when the employee turns sixty and when the employment relationship is terminated. Those who continue to work after their 65th birthday can also ask for the pension capital to be paid out even if the employment relationship is continued.
Most people choose to have their pension capital paid out as a lump sum. A relatively small number of people opt for a lifelong annuity and will have a supplementary income in addition to the statutory pension. This system is only advantageous for those who continue to live for more than 25 years after they retire. Lifelong annuity is therefore for optimists who are in good health.
Second pillar: the government is lagging behind
The second pillar is rapidly gaining in popularity. In 2004 it was available for 31% of employees. Today that is already 70%.
In practice, medium and large enterprises often have better pension plans than small enterprises. Moreover, the private sector and – to a somewhat lesser extent – the social-profit sector have a slight head start. Local governments have only started taking action relatively recently. Kristel Awouters:
"Provincial and local governments can join one of the three insured plans. The largest initiative is a group insurance scheme with the National Social Security Office of the Provincial and Local Authorities set up by the Association for Cities and Municipalities. Limburg province started a separate initiative for the municipalities of that province and for its own contractual staff, and West Flanders province has done the same for its contractual staff. A fourth possibility is a pension fund set up by Antwerp province for its municipalities. Local and other governments can also engage a private partner to further develop the second pillar."
Brussels and Wallonia have announced their own initiatives. Although the Flemish initiative has been made available for the rest of the country, only a few Walloon municipalities have as yet joined. No global initiative has been put in place yet for contract staff employed by the federal public services, but outgoing pensions minister Alexander De Croo has announced in his policy document that a statutory framework would be created for further developing this type of supplementary pension.
"The sooner the public services start up the second pillar, the better. Employees accrue supplementary pension capital as a supplement to statutory pension and can usually also take out life insurance and/or incapacity for work insurance. Moreover, in terms of taxation the system is more interesting than a salary increase. The tax on the final pension benefits is also reasonable. Those that wait until the age of 65 to withdraw their pension capital and have remained active until that age, pay 10% today."
Generalising and strengthening
According to Luc Zuallaert, there are also many advantages for the employer:
"Any organisation that takes itself seriously will want to fulfil its corporate social responsibility commitment and offer its employees additional protection. Being able to offer a second pillar is also an asset in the 'war for talent'."
The second pillar still has some weaknesses, nonetheless. Today, the average contribution is still limited. Too limited, Kristel Awouters believes:
"That is often the case for sectoral plans, which are agreed in the sectors' joint committee. An annual premium of 1% does not add up to a lot, even after a full career. In 40 years' time this yields a pension annuity of only 2.10% of the last salary. That is not enough. The aim should be to create a replacement ratio of 20% with the supplementary pension. To achieve this the premium should be gradually increased to 9%. In addition, the supplementary pension must be generalised for everyone."
An increase to 9% is a lot. In some companies and for certain levels of employees this is already the case, but most public services are still far from this target. Luc Zuallaert:
"It is difficult to achieve. Maybe employees should, in the future, be able to opt for less salary and more contributions to the second pillar. But the government must then ensure that people are not punished for this with higher charges on retirement. There is a need for predictability in all areas."
The WAP guarantee ('Wet op de Aanvullende Pensioenen', Act concerning Supplementary Pensions) on minimum returns is a hot topic in the second pillar. It is employers, rather than insurers or fund managers, who are responsible for guaranteeing this minimum return at the end of the line. This is a unique arrangement which does not exist anywhere else in the world.
Until recently, the WAP guarantee amounted to 3.25% of employer's contributions and 3.75% of personal contributions. However, in mid-October 2015 the social partners concluded an agreement to amend the guarantee. Beginning on 1 January 2016, the system will become a variable one, where the guaranteed annual annuity will amount to a given percentage of the average return on 10-year government bonds, calculated over a period of 24 months. The resulting figure cannot in any case be lower than 1.75%, nor can it exceed 3.75%. Benoit Halbart, Director Marketing & Communication AG Employee Benefits - Health Care:
"So far, the WAP guarantee has not given rise to any problems. Due to the low interest rates, we at AG Insurance reduced our guaranteed return for new contributions to 1.5%, but through the profit-sharing scheme our customers are assured of a return of 3.25% on all contracts until 2016.
If interest rates remain low, problems may arise for employers in the long term. Employers may then have to make additional deposits when an employee retires. This may inhibit the willingness of employers to further extend the second pillar."
Cafeteria and bonus plans as an alternative?
A group insurance need not be a passe-partout solution. Take the cafeteria and bonus plans, for instance. They have been around a long time in the private sector, but in the public sector they are sometimes nipped in the bud by the principle of equal treatment of all employees. What do they entail?
A cafeteria plan is a tailored group insurance scheme. Members are entitled to the same premium budget, but within the limits of this budget they can pick and choose the elements of cover that suit them. death, incapacity for work, etc. The balance is used to accrue supplementary pension.
- Advantage for employees: the option to mix and match. Moreover, they can take an advance on the capital to repay a home loan or to finance a renovation, for instance. Employees can modify their choices and assess the impact of these choices on a secure website.
- Advantage for employers: they can offer an attractive, flexible remuneration package to young people whose retirement is still many years away and not yet a tangible concept.
A bonus plan involves a bonus that is not paid in cash but partly or fully deposited into a group insurance plan.
- Advantage for employees: only 30% of a bonus in cash remains for the employee. A bonus plan has tax advantages: the net amount increases to 73-74%. Moreover, like the cafeteria plan, this formula allows employees to take an advance.
- Advantage for employers: they can reward an employee's good performance in a tax-friendly way.
Pensions in the public and social-profit sectors: two concrete examples
We took a look behind the scenes at the City of Ghent and the Onze-Lieve-Vrouw hospital in Aalst to find out how they are boosting their employees' pensions.
Ghent avoids financial loss
The "noose-bearers" regularly make headstrong choices, and it is no different this time. Ghent chose not to reduce the number of officials but in fact increase them where possible.
A price has to be paid for this policy choice. How is the city doing this? And what is it doing for its contract staff? Katrien Verheye (Finance and Budget Department of the city of Ghent) outlines the challenges:
"If we leave out the police, the fire department and subsidised teaching staff, the city of Ghent has just over 4,000 employees. Of these, 57% have the status of official. This is a lot in comparison with other public services. The Flemish region employees 40% officials, for example, and the Walloon region 32%".
Dipping into savings
Just like other local governments, the city of Ghent pays the pensions of its officials. In 2006 the city decided to join the National Social Security Office of the Provincial and Local Authorities (NSSOPLA) in the hope of reducing their pension costs. Katrien Verheye:
"At first, this was indeed the case: the pension contributions were lower. But we knew this was not going to last and that the NSSOPLA would ultimately have no other choice but to increase the contributions. We had already outsourced the management of our pensions in 1994 to an insurance group, and the pension contract provided for a reserve fund. After 2006 some financial breathing space was created as a result of joining the NSSOPLA. We did not spend that money but put it into the reserve fund.
In subsequent years those savings grew substantially: until 2012 we paid our insurer more than the obligatory contributions. As a result of the pension reform of 2012 our contributions to the NSSOPLA started to rise. Since then we have been using our savings in the reserve fund to make up the difference. Thanks to that buffer we can pay our accountability contribution."
The period until 2035, with the retirement wave of the baby boomers, will be the most difficult period. Will our savings be enough to bridge this period? Katrien Verheye: "Every year we commission a pension study that looks ahead some thirty years. The latest study showed that we are safe until 2040, on condition that the NSSOPLA does not suddenly and significantly increase the accountability contribution. Furthermore, we have not had to radically cut back on our investments to do so, whereas many municipalities have had to do this because of the financial crisis and the sharp increase in pension contributions.
One-off extra premium
Ghent's contract staff – almost half of the workforce – have not been forgotten either. The city wants to narrow the gap between officials' pension and contract staff's pension as much as possible. To this end, in 2010 the city joined the initiative of the Association for Cities and Municipalities: the Group Insurance for Local and Provincial Governments. Katrien Verheye:
"According to current personal income tax legislation it is, in practice, not necessary to fully bridge the gap between the two pensions. If we succeed in bridging 60% of the gross gap we will have bridged 90% of the net gap. We also know approximately what percentage of the fixed fee you have to pay into the group insurance. Someone in a lower scale who sets aside a fixed contribution of 4% during their entire career can bridge approximately 76% of the gross salary gap. For the higher scales this is approximately 48%. For those who only have 15 working years to go, the figures are 21% and 20% respectively."
In practice, the city of Ghent has since 2010 been paying a fixed contribution of 1% into the group insurance scheme. This was increased to 2% in 2015. In addition, there is a little extra for employees of the City of Ghent and OCMW who have had a long career as contract staff. They will, after all, receive almost nothing from the fixed-contribution system. Katrien Verheye:
"In 2010 we paid a one-off premium to the insurer for our contract staff, which means they will receive additional pension depending on the length of service."
OLV Aalst opts for a balanced and budget-friendly solution
The Onze-Lieve-Vrouw hospital in Aalst has had a group insurance scheme since 2011. This scheme has two components: a general fixed plan for all employees and a separate cafeteria plan for senior nurses.
The Onze-Lieve-Vrouw hospital employs around 2,500 people. Converted to FTEs, this means 1,960 jobs. Of these, 1,100 work directly in care (nurses, care providers, etc.). The rest of the workforce consists of paramedics (such as speech therapists and physiotherapists), manual workers (kitchen, maintenance, etc.), administrative staff and specialists in training. There is one thing they have in common: they are all contract staff. A group insurance is therefore no superfluous luxury in terms of their pension on retirement.
"It was the missing link in our remuneration policy", as HR Director Myriam De Bruyn puts it. "The immediate cause was shortage in the job market. Today the situation is better, but around five years ago it was very difficult to find nursing staff. We conducted a benchmark survey in which we compared our remuneration policy with that of other hospitals. There are of course many factors that make an employer an attractive employer. A challenging working environment, for instance, and the opportunity for lifelong career learning. Moreover, the study showed that a group insurance helps to attract and retain talent."
The largest part of the group insurance consists of a fixed premium which the hospital pays. This premium is the same for all employees: 250 euros per FTE per year. So those with a 0.5 FTE contract receive 125 euros. Myriam De Bruyn:
"These are not large amounts, as our budget did not allow for more. Just calculate the cost for 2,500 employees: it adds substantially over time. We have to finance this from our own funds, as we receive no public funding. In any case, it is a start."
On the whole, our employees were happy with the introduction of the group insurance. Some people did ask if they could make additional deposits into the group insurance. The hospital looked into this option, but ultimately decided not to go ahead with it. The reasons were of a budgetary nature, Myriam De Bruyn admits:
"The fact is that the employer has to guarantee a return of 3.75% on the employees' own contributions, even if the insurer does not achieve that return. At the time the insurers informed us that they could not even give a guarantee of 2.25% any more. We cannot run the risk of having to contribute large, unexpected amounts in the future."
For the same budgetary reasons the hospital was unable to offer a little extra to older employees, who would only be able to benefit from the group insurance for a few years.
"That is made up in part by the fact that they still have benefits which their younger colleagues will no longer have in the future – more options in the area of early retirement, for example."
Cash, car or pension
Senior nurses have a supervisory role, a lot of responsibility, and have to implement and justify management's policies to the nursing staff in their department. That is not always easy. Statutory salary scales do not provide a lot of margin to reward their efforts through their actual salary. This is why the Onze-Lieve-Vrouw hospital decided to give its 57 senior nurses a little extra by means of separate group insurance. Myriam De Bruyn:
"This is a cafeteria plan. They receive 10% in addition to the statutory salary scale. Depending on the length of service, that can add up to 300 to 400 euros gross per month. They can choose how they receive that amount: in cash, in the form of a small lease car, or a deposit into the group insurance. The large majority uses the extra amount for their pensions savings. We think this is an elegant way to reward people for their efforts."
The cornerstones of a strong pension strategy
Renaud Vandenplas, Head of BNP Paribas Securities Services Belgium, provides advice on how to optimise your organisation's pension strategy.
Which pension services do you offer?
Renaud Vandenplas (RV): "BNP Paribas Securities Services focuses exclusively on institutional customers like corporates, insurance companies, traditional investment funds or pension funds, but also municipalities, public enterprises and players from the non-profit sector. We offer them a wide range of state-of-the-art custody and operational services on securities trades. What this means in terms of pensions is that we do not advise our customers on the choice of strategy for accruing supplementary pension for their staff, but process the orders arising from the implementation of this strategy once the choices have been made."
What tips do you have for organisations in the public or non-profit sector?
RV: "I have three tips. First and foremost, I would advise them to call in an experienced consultant to draw up a strategy suited to their specific needs. It is, after all, a highly specialised domain that requires specific competencies. Naturally our bank can assist the customer in this step and use its expertise to implement the chosen solution, but independent advice from an external specialist truly adds value.
I would also advise them to work with a single service provider for the custody and valuation of pension funds that have different asset managers – consider for instance funds that invest in equities, bonds and real estate. This means they have a central point of contact to whom they need issue only one instruction, which guarantees more efficient execution. This approach also ensures more efficient reporting, with information that is more accessible and easier to use. And, not forgetting: it lowers costs.
The third tip I would give customers is to ensure quality reporting. This has become essential in a financial climate that is much more dynamic than before. At BNP Paribas Securities Services we offer our customers a follow-up instrument tailored to their specific expectations. This could be permanent reporting of price trends, for instance, or a comparison with relevant benchmarks and economic indicators or a risk assessment of the performance. This allows them to permanently monitor, down to the smallest detail, the evolution of the assets for which they have outsourced the operational management."
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