The guaranteed return on occupational pensions is currently under revision due to the significantly lower contractual returns offered by insurance companies. After an extensive negotiation phase, the social partners have reached an agreement.
Since the implementation of the Law on Supplementary pensions in 2004, the guaranteed return on defined contribution schemes was defined as follows: 3.25% per annum on 95% of the employer’s contributions, provided the employee does not leave the company within five years since affiliation, and 3.75% per annum on the employee contributions.
For the last three years, the majority of insurance companies were no longer able to guarantee the aforementioned returns due to a substantial decrease in the market rate. However, it is the employer who has the legal responsibility to guarantee the minimum return and as a consequence will have to pay the difference in case of a deficit.
Variable and unified return
As of January 2016, the guaranteed minimum return will be variable with a minimum rate of 1.75% and a maximum rate of 3.75%, and applicable to both employer and employee contributions.
The applicable return will be calculated according to the following formula:
- As of January 2016, the return will be equal to 65% of the average return of the 10-year Belgian linear bonds over a period of 24 months
- As of 2018, the return may increase from 65% to 75% if approved by the regulator
- As of 2020, the return may increase from 75% to 85% if approved by the regulator
As a result of the above formula, three possible scenarios exist:
- If the calculated return is lower than 1.75%, a minimum return of 1.75% will be applied
- If the calculated return is between 1.75% and 3.75%, the resultant rate will be applied
- If the calculate return is higher than 3.75%, a maximum rate of 3.75% will be applied
The guaranteed minimum return will automatically be adjusted on January 1th of each year, provided the variance exceeds 0.25bp.
The impact of the above on the accumulated reserves, is dependent on the concerned pension vehicle or insurance product.
- Insurance product of branch 21 (with guaranteed return): the new percentage will only be applicable to future premiums, the accumulated reserves will further evolve according to the previous percentage (horizontal method).
- Insurance product of branch 23 (without guaranteed return) and pension funds: the new percentage will be applicable to accumulated reserves as well as future premiums (vertical method).
All branch 21 schemes maintain the 3.25%/3.75% on the reserves accumulated by December 31 2015, till the end date of the contracts. Thus, the employer continues to hold the responsibility in case of a deficit.
With the return adjustment from 3.25%/3.75% to 1.75%, employers’ financial risk now decreases on branch 23 and pension funds. However, a high financial risk remains if the minimum rate increases, as the higher return will need to be granted towards all previous accrued reserves.
In case of future pension plan changes, it is recommended to thoroughly consider the choice of pension vehicle and insurance product.
Lastly, it should be emphasized that the aforementioned rules are not yet final, as they still need to be converted into legislation.