PARTICULARITIES DEFINED CONTRIBUTION SUPPLEMENTARY PENSION SCHEMES IN BELGIUM

For employers in Belgium, it is therefore key to do proper due diligence when starting/taking over a company in Belgium, as both DB and DC schemes pose a certain risk in terms of funding

Employers engaging in activities in Belgium often provide a supplementary pension plan to their employees, given the tax-friendly status of such benefit for both employers and employees. There are however some particular characteristics that should be kept in mind when starting or taking over a supplementary pension plan in Belgium. It is key for (future) employers in Belgium to be informed about the potential pitfalls of such plans before they engage in any commitments towards their employees.

Before discussing this in further detail, it is good to have a better overview of the pension system in Belgium:

Belgium has a three-pillar pension system which consists of i) earnings related statutory (and mandatory) pensions, ii) supplementary pensions which are mainly provided by employers to their employees, and iii) tax incentivized individual pension savings.

A. Statutory pensions

Participation in and contribution to the statutory pension scheme is compulsory for all citizens and employers alike. The state pension scheme is administered by several administrations due to the fact that employees, self-employed persons, and statutory personnel of the state have their own pension regulations. It was (and still is) the ambition of the Belgium government to harmonize these schemes in the future, but given the specific character of every system, it is likely that this will not happen in the near future.

The normal pension age in Belgium is 65, but this will be increased to 66 by 2025 and 67 by 2030. It is, however, possible to retire earlier, provided that the person concerned has reached a certain age, and his/her total career in Belgium, and in countries that have a social security agreement with Belgium is sufficiently long. For statutory pension purposes, a 'full' career in Belgium counts 45 career years, whereas early retirement is possible as from 42 careers years, provided the person concerned has reached the age of 63 (or 44 career years at 60, 43 career years at 61/62).

B. Supplementary pensions

Private pension arrangements in Belgium are generally governed by the Act of 28 April 2003 on supplementary pensions (Supplementary Pensions Act, further SPA). Pension contributions by the employer can be seen as voluntary (if not bound by a sectoral agreement) and paid to the pension fund in accordance with the terms and conditions of the policy provider. Employees have limited options to withdraw their pension savings before their legal pension age (e.g. for purchasing real-estate).

Traditionally, Defined Benefit plans (further DB) – i.e. a pension plan in which an employer promises a specified pension payment predetermined by a specific formula rather than purely on the investment returns - were very successful in Belgium, but Defined Contribution plans (further DC) have become more dominant due to the advantages for employers (e.g. lower financial risk).

Before 2016, the law provided a guaranteed return of 3.25% on employer contributions and 3.75% on employee contributions in defined contribution plans. Due to the recent economic climate, it was decided that these percentages were too high. Therefore, as from 2016 the return that is guaranteed corresponds to the percentage of the average of the last 24 months of returns of the Belgian linear bonds for a duration of 10 years. This will be a percentage between 1.75% and 3.75%. Based on these rules, the guaranteed return for 2022 will be 1.75% and this will apply to both employer and employee contributions. The foregoing also implies that if a company is subject to International Financial Reporting Standards (e.g. IAS 19), you will need to take into account that DC plans in Belgium will be categorized as DB plans.

This has important consequences – which were also underlined by the Belgian Supreme Court in 2017 – that the employer has the final responsibility for guaranteeing this guaranteed return should the insurance company or pension fund be unable to do so.

Particularly, the Supreme Court stated in its judgment that the organizer of a pension arrangement (i.e. mostly the employer) is liable for all vested reserves, as well as deficits regarding the minimum guaranteed return. The cause of potential deficits are irrelevant for the Supreme Court for the obligation of an employer towards its employees. This judgment was based on the liquidation of the pension provider 'Apra Leven' in 2011. In 2014, the Labour Court of Antwerp stated in its judgment that an employer has the final responsibility for the fulfillment of the pension obligations towards their employees, as there is a trilateral relationship created by an employer with a pension provider, be it i) an insurance company or ii) a pension fund. The employer has the final responsibility under Belgian labor law mainly due to the fact that i) the employees do not have a direct relationship with the pension provider and ii) pension contributions can also be seen as 'salary'.

In the case at hand, the organizer (employer) went to the Supreme Court to challenge the decision of the Labour Court of Antwerp. The argument was that the company could not be held liable as the issue was created by the insurance company, 'Apra Leven'.

The Supreme Court, however, ruled very clearly that the organizer/employer has the final responsibility and that the causes for any deficit are irrelevant.

C. Recommendations towards employers

For employers in Belgium, it is therefore key to do proper due diligence when starting/taking over a company in Belgium, as both DB and DC schemes pose a certain risk in terms of funding. Under IAS 19, DC schemes will indeed be categorized as DB schemes which can evidently confuse potential investors/employers.

In case of taking over a company in Belgium, the method of transfer (contractual or automatic following Transfer of Undertakings Protection of Employment Regulations, further 'TUPE') will, in practice not have a significant impact on the treatment of the supplementary pension plan(s), because (even) in a TUPE scenario, supplementary pension plans will not transfer automatically. However, according to the majority of legal scholars, the premium paid by the employer is in itself a benefit and therefore the new employer should offer an alternative benefit with comparable cost.

Proper due diligence is therefore needed in all cases.

Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.