In Belgium, Social Security is generally provided for all workers, salaried and non-salaried, with significant company pensions usually operating only for salaried or white-collar employees. For blue-collar employees very small company pensions are provided, often via a sector plan. However, projected increases in the number of pensioners relative to contributors and the weakness of Government finances will result in the relative reduction of state benefits in proportion to salary levels. Company pensions can be funded either through an insurance company or a self-administered pension fund (Organisation for Financing Pensions – OFP). The use of a book-reserve (or unfunded) system is not permitted.
Important Social Pension legislation was implemented in 2004 and in 2006 a law on the supervision of Institutions for Occupational Retirement Provision (“IORP-Act”) was voted in.
As a consequence of the law of 27th October 2006, Belgium is offering multinationals a complete and comprehensive framework with a view to the creation of both pan-European and international pension funds. Belgium has implemented a structure that is very effective and provides an advantageous legal, fiscal and prudential framework. A broad range of modern treaties for the avoidance of double taxation has been concluded, thereby offering substantial savings with regard to the share portfolio of each fund.
Multinationals are therefore encouraged to set up their pan-European or international pension funds in Belgium and to benefit from the favourable financial conditions proposed by the Belgian legal framework.
In theory, a retirement pension equals 75% (if married with dependants), or 60% (if unmarried, or where both spouses are entitled to a pension) of the revalued career-average earnings after 45 years’ contribution.
Employees will be able to retire from age 60 with an unreduced pension (although calculated on the years of contributions made), provided they have been contributing to Social Security for at least 43 years.
In calculating the pension, each year’s earnings are subject to a ceiling. The ceiling applicable for 2017 is €54,648.70. The employee and employer contributions are not subject to a ceiling. The contribution rates required in respect of retirement and survivors’ pensions are currently 7.5% and 8.86% for the employee and employer respectively.
A pre-pension arrangement exists where unemployment allowances are paid. On top of these unemployment allowances, the employer pays a temporary pension up to the normal retirement age. The part-time pre-pension arrangement, introduced in August 1994, allows employees to work part-time instead of full-time, while they receive a “part-time” pension, in addition to their part-time salary, provided certain eligibility conditions are met. The benefit is payable until the normal retirement age. The normal retirement age is age 65 for employees attaining 65 before 1st February 2025, age 66 for employees attaining age 66 beforre 1st February 2030 and age 67 for younger employees.
Defined benefit schemes are still a fairly common form of plan, but defined contribution plans are gradually gaining prominence with more than 50% of the plans currently being defined contribution plans. Some innovative companies introduce hybrid plans, with a reduced defined benefit target, supplemented by a defined contribution or sometimes a cash balance plan. Multinational companies often still provide pensions based on final (average) salary, permitting in most cases full lump sum commutation. Typically, the company plan will aim to provide between 1.25% and 2% of final average earnings for each year of plan membership, less the Social Security pension earned during company service. Plans customarily integrate with the Social Security system by defining different accrual rates for earnings below and above the Social Security ceiling (e.g. 20% and 70% respectively). Such arrangements are not directly exposed to the impact of the evolution of Social Security benefits.
Most defined benefit plans provide for a “retirement capital” instead of a “pension (annuity)” in order to keep future employee benefit costs under control, as a result of longer life expectancy and the subsequent review of mortality tables.
Employees are often required to make a small contribution of 1% to 2% of earnings up to the Social Security ceiling, and usually contribute in the range of 4% to 6% of earnings above the Social Security ceiling. However, there is a tendency to waive employee contributions because of the limitations on tax exemption and the gain in employer Social Security contributions.
The government has introduced fiscal incentives for postponing actual retirement ages, by reducing tax on retirement lump sums payable to employees that remain active up to their normal retirement age. Due to discrimination law, all plans have to provide benefits for service up to the normal retirement age. However, a number of plans still allow employees to retire at 60 with an unreduced pension.
Upon the death of a member, it used to be common that a spouse’s pension is paid equal to 60% to 70% of either the prospective retirement pension on death in service (often payable under the form of a lump sum), or the actual pension of a retired participant. In case of death in service, many plans have introduced a lump sum death cover for the surviving partner or dependent children. Such a lump sum ranges from one times annual base salary (for single employees) up to 4 to 6 times the annual salary, depending on the family situation.
Benefits under insured arrangements are usually operated on an individual allocation basis, while pension funds mostly apply a non-allocated funding approach.
A first major milestone in the Belgian occupational pension arena was the law on occupational pension plans, “the Colla Law”, adopted by a Royal Decree of 10th January 1996. A second major milestone was the “Vandenbroucke Law” of 28th April 2003 adopted by the Royal Decrees of 14th November 2003. This law includes legislation on industry-wide pension arrangements and individual pension promises. The last major change was made by the law of 18th December 2015.
The most important features of this law are:
The most common method of funding company plans is by insurance. Self-administered funds are also used, particularly by larger schemes and those employers conscious of the impact of flexible investment on cost. These must be established within the framework of a separate Organisation for Financing Pensions (OFP). OFP’s are under strict control including the requirement to meet minimum funding standards.
Pension payments are fully taxable as income and are further subject to a double social security charge: an illness and disability contribution of 3.55% on pensions above certain ceilings which was implemented many years ago, plus “solidarity” contribution which varies from 0% to 2%, depending on the individual pensioner’s income. Under the law on additional pensions, for lump sums converted into pensions, the taxation rate has become identical to the rate applicable to lump sum benefits provided a certain mechanism is followed in converting the lump sum to a pension.
Lump sum benefits continue to be taxed at a favourable rate of 16.5%, to which local taxes and the “solidarity” social security contributions, as mentioned above, need to be added. The rate of 16.5% is reduced to 10% for the capital emanating from employee contributions after 1st January 1993 and in the generation pact law, the rate of 16.5% is reduced to 10% for employees that continue to work until normal retirement age. There are no taxes on payments coming from insurance company profit participation, but the above-mentioned double social security contributions are charged.
Employer and employee contributions are tax-deductible. Voluntary employee contributions to insured plans are also tax-deductible up to certain limits (they are considered as part of the third pillar, and as such compete with individual life insurance policies and mortgages). Under the system of tax credits, employee contributions are tax-deductible at the average rate at which tax is paid, but restricted to the range between 30% and 40% (plus local tax).. However, the total retirement income from an approved scheme, together with the state pension, must not exceed 80% of final gross salary for a full career of 40 years, and will be pro-rated for shorter service with the employer. Contributions to pension plans are only tax-deductible provided benefits do not exceed this limit. In order to qualify for the tax advantages, insured and self-administered schemes are subject to specific regulations – in particular, there are requirements on the eligibility conditions and benefit definitions. Additionally, membership must be compulsory for new employees who satisfy the objectively defined eligibility criteria.
A tax of 4.4% is payable on all contributions (both employer and employee) to pension schemes, except for the rare “social schemes”. This is in addition to the 8.86% social security tax on employer contributions to all plans. There is no taxation on the investment income, apart from the non-recoverable withholding tax on foreign interest or dividends. There is no capital gains tax.
