A supplementary pension plan is and remains a highly recommended personnel benefit when it comes to competitive salary packages. After all, using the same budget, you as an employer can offer higher net benefits to your employees compared to an increase in salary.
Even in times of low interest rates it remains difficult for an employee to close this gap with the returns of a private investment or an investment in, for example, property. Thanks to a group insurance, employees will still receive an attractive supplementary pension capital when they retire.
The Belgian statutory pension is not expected to rise significantly, which makes it particularly worthwhile as a caring employer to help your employees maintain a good standard of living after their retirement. So the more return, the better.
- Group insurance in Branch 21
For many years group insurances were mainly taken out in Branch 21. A Branch 21 group insurance offers employees a specific return, i.e. a contractually agreed interest rate that may be supplemented where applicable with a profit sharing, depending on the insurer’s results.
In times of low interest on Belgian OLOs, the interest rates guaranteed by insurers on a Branch 21 group insurance also decreased. Until 2013 the guaranteed interest rate was still 3.25%. Since then it has dropped well below 1%. Even (limited) profit sharing could often not fully close the gap with the WAP guarantee (see box for more information).
This created a conflict between what an employer is legally obliged to provide as a return and the returns they received from the insurers. This conflict is referred to as ‘underfinancing’ in technical jargon. It could potentially result in an employer being presented with an additional bill for the financing of their group insurance.
Important: some insurers recently increased their interest rates to between 1.25% and 1.75%.
- Group insurance in Branch 23
Due to the continual low returns in Branch 21, we noticed a distinct change in the market in recent years leading to more and more employers investing in a Branch 23 formula with variable returns. Some switched to a pension fund.
By choosing pension products with variable returns employers are taking a chance in terms of higher returns and potentially smaller underfinancing risks. It is essential though to draw up the plans in such a way that the investment risks are adequately spread. Unfortunately, the economic situation demonstrated that negative returns in Branch 23 are not entirely excluded. Historically, however, the returns on these types of insurance products were higher on average than the returns in Branch 21.
It is important to keep in mind that group insurance is a long term investment, until the retirement age of the insured person, and that stock market fluctuations are usually smoothed out given this long investment horizon.
We already noted that several insurers have recently substantially increased the interest rates in Branch 21 group insurance to between 1.25% and 1.75%.
From 2025 onwards we also expect an increase in the legal guaranteed return (see box for more information). The interest rates on OLOs are once again on the up and the financial markets expect that these positive interest rates will be maintained for a longer period of time. Based on the current economic situation we estimate that the new WAP guarantee will be around 2.50%. It remains to be seen, however, whether the guaranteed interest rates in Branch 21 will rise to a comparable level.
It is definitely worthwhile, therefore, to take a closer look at the current returns on group insurance. We recommend investigating whether, on the one hand, the risk of underfinancing can be limited for the employer and, on the other hand, whether employees can obtain higher returns. In doing so, alternative pension accrual scenarios could be looked at for employees, e.g. a switch to a Branch 21 group insurance with higher guaranteed returns, a Branch 23 group insurance or a pension fund. With the right carefully considered approach, companies can give themselves and their employees a significant financial boost.
Would you like to investigate the potential positive impact of the current interest increases on you as an employer and on the supplementary pension accrual of your employees? If so, please contact your Account Manager Employee Benefits at Vanbreda Risk & Benefits.
