All change in Belgium

Adam Cadle analyses the Belgian pension reforms sweeping across the country and what these mean for the population.

On 6 December 2011, Elio Di Rupo became Belgium’s first socialist prime minister since 1974 and his appointment by King Albert II followed 541 days of political deadlock, in which Belgium had no government. So far, however, it has not been plain sailing for Di Rupo. At the end of the year, an €11.3 billion austerity package was agreed and this has since been extended by €1.82 billion, designed to keep Belgium’s 2012 budget deficit within EU limits. These decisions by the Belgian government have been met by a number of strikes across the country by angry trade unionists. Part of the reason for the government’s decision to implement an austerity package was due to Belgium’s credit rating being downgraded to AA from AA+ by rating agency Standard and Poor’s – the country’s first down-grade in almost 13 years.

It is within the area of pensions and the general retirement market where there are particular problems however. Aegon Global Pensions regional sales director Heleen Vaandrager says: “Belgium struggles with similar problems as many of the European countries and also the US. One of the biggest problems is an ageing population and this will result in longer periods of retirement that will have to be paid for. Belgium in particular has a large amount of state debt. As the country went through a relatively long period of time without a government in place, decisions and directive proposals have been delayed, and therefore the country is in a backlog with regards to organising its retirement system.”

Historically, the Belgian pension system has been generous. Based on a three-pillar system, it has always had a number of early-retirement arrangements in place within the structure. The first pillar, containing the public pension in a pay-as-you-go system, is particularly generous, providing 60 per cent of the last salary in the case of a 45-year career, and if one has a dependent spouse, this percentage rises to 75 per cent. “This results in a big liability,” comments Vaandrager. “It means in order to fund this amount, the state has to set aside 250 per cent of GDP in their books and this has to be adjusted each time the rate of longevity increases.”

In order to address growing pension concerns, Di Rupo and his government proposed to raise effective retirement ages and also increase taxes on pension funds. The gap between the state pension age, 65 for men and women, and the actual retirement age is almost the highest in Europe. On average, men retire at 58.5 years and women on average retire at 56.8 years. This is of course a problem and the government has therefore agreed to implement changes to tax rates on pensions. For individuals retiring at 60, retirement funds will be taxed at 20 per cent, an increase of 3.5 per cent from the previous 16.5 per cent figure and for those people choosing to retire at 62, they will be hit by a tax rate of 18 per cent. Furthermore, under the current reform, the early retirement age will increase to 62 in 2016, with employers having to prove a career of 40 years instead of 35. Franklin Templeton senior director for Southern Europe and Benelux Sergio Albarelli underlines that these changes will “encourage people to work more, stay in the system for longer and will potentially generate more contributions on an annual basis”. The changes have however resulted in a conundrum for Belgian workers in the pre-retirement period, because the amount of tax they will have to pay on their pensions is increasingly higher the earlier they take retirement. Vaandrager argues that this “may cause people to delay their retirement”.

Opposition to these measures and the general austerity package designed to bring public sector deficit down to 2.8 per cent of GDP this year from 3.8 per cent in 2011 have been fierce, with public sector workers disrupting travel across Belgium – the country being paralysed by a 24-hour strike at the end of December.

Fédération Générale du Travail de Belgique (FGTB) union adviser Anne Panneels emphasises the level of discontent and dissatisfaction amongst trade unionists at the actions of the government. “This is generally speaking a very unfair decision. Moreover, studies should be taken into account, showing that pushing the conditions for retirement to a minimum of 40 years of a professional career does not significantly reduce costs. A recent report shows that the cost would reduce from 5.6 per cent GDP to 5.5 per cent GDP over the period from 2010 to 2060.”

In further displays of dissatisfaction over the pension reforms, hundreds of Belgian firefighters took to the streets in Brussels and decided to hose down the prime ministers offices whilst roaring cries of “Pas d’accord” in protest at having their early retirement
age pushed back to well into their 60s, claiming that the nature of their occupation would not allow them to work later. This situation is clearly yet another example of the length people in countries across Europe will go to, to try and ensure that their retirement provision is not affected by economic cutbacks and downgrades.

Whilst in the current climate, there appears to be a great deal of ‘chopping and changing’ occurring across Europe with regards to maintaining the sustainability and suitability of pension systems to deal with issues such as longevity risk, from an investment/asset allocation standpoint, revisions are also being conducted in this area. “The Belgian pension system is not the only one in Europe that is actually in the process of revising asset allocations in order to correct some issues with the current structure,” says Albarelli. Pension funds are continually looking to construct stable portfolios and are looking for alternatives to indexes that have been used in the past. Diversification is key and Albarelli comments: “We expect more and more RFPs to be placed in emerging markets and global bonds going forward.” Dexia Asset Management head of pension solutions Kristof Woutters shares the viewpoint that a lot is changing within the country concerning asset allocation structures.

“Many pension funds have started to adopt liability driven investment (LDI) strategies across Europe,” Woutters mentions. “If you start implementing LDI strategies then you have a shift of focus towards the fixed income assets. The sovereign debt crisis resulted in pension funds moving away from government bonds towards corporate bonds. In the past, 70 to 80 per cent of portfolios were invested in government bonds in the fixed income part of portfolios.”

Overall, therefore, one can clearly see that Belgium has been facing and continues to face a number of challenges within its pension landscape. Di Rupo’s government has said that it is absolutely paramount that these issues are dealt with. Whilst the FGTB has stated that no further strikes are planned, actions designed to challenge these reforms are still possible. As the economic climate is still very much in the process of change, pension funds will have to continually monitor their specific investment routes and strategies to profit from this situation.

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