Pension rate rises to 2.50% - key employer info

December 2024

In Belgium, the Supplementary Pensions Act (WAP/LPC) mandates that deposits into supplementary defined contribution pension plans must yield a minimum return annually, ensuring that the contributions made by employers and employees into DC plans achieve a certain level of growth over time. This rate, known as the WAP/LPC rate, is recalculated yearly based on Belgian 10-year government bond (OLO) rates and must remain between 1.75% and 3.75%.

Due to persistently low interest rates, the WAP/LPC rate has been fixed at 1.75% for several years. However, starting in 2025, employers will need to guarantee a minimum return of 2.50%. This change has significant implications for employers and their pension plans.

• Branch 21: For group insurance policies with guaranteed returns, the new minimum interest rate primarily applies to new premiums, as these policies typically use what is known as the "horizontal method."
• Branch 23 & Branch 44: For these types of group insurance, the new minimum interest rate generally applies to the entire pension reserve, as they often utilize the "vertical method."
• Employers setting up a new scheme can choose between the horizontal or vertical method, but feasibility should be confirmed with AG beforehand. The default is to use the horizontal method for Branch 21 and the vertical method for Branch 23 or hybrid funding.

This distinction means that group insurance policies governed by the horizontal method will see the new higher minimum rate affecting new premiums only. Conversely, plans managed under the vertical method (primarily Branch 23 and hybrids) will have the entire pension reserve subject to the new rate. This can lead to significant implications for pension funding.

The increase in the minimum interest rate means higher capital must be guaranteed for employees at retirement or when transferring reserves to a new employer's pension plan. The exact impact varies for each employee, depending on factors such as the type of pension plan and the duration of their membership.

A rise in the interest rate from 1.75% to 2.50% can result in a more than 20% increase in the minimum final payout for younger employees who stay with the same employer throughout their career.

For the first time in eight years, the statutory minimum return on supplementary pensions is set to rise. This presents significant challenges and opportunities for the second pillar of pension plans. Employers and HR managers need to understand the steps required to adapt and the potential impact on their pension schemes.

By staying informed and proactive, employers can ensure their pension plans continue to provide valuable benefits to their employees while meeting regulatory requirements.

1. Examine current plans: Assess your existing supplementary pension plans to understand how the new minimum interest rate will affect them.
2. Evaluate pension investments and providers: Consider the performance and flexibility of pension providers. For example, AG offers a diverse range of solutions with attractive returns.
3. Communicate with employees: Although not legally required, it is considered best practice to ensure your employees are informed about the changes and how they may impact their retirement savings.
4. Thoughtful financing: You may need to provision a financial buffer to meet the new minimum interest rate requirements.

AG provides a variety of investment options within Branch 21, Branch 23, or Branch 44, with a track record of strong performance, yielding returns that are considerably higher than the statutory minimum.

Branch 21: security and stability     

• A guaranteed return each year, with possible profit sharing: Branch 21 policies offer a guaranteed return on premiums. The premiums are managed individually and linked to the AG Employee Benefits General Fund, which has consistently delivered stable yields. For example, the yield since January 2024 has been 1.75%. In addition to the guaranteed return, policyholders may benefit from additional annual profit sharing based on AG’s financial performance.
• Attractive net total return: The average net total return on average growth through premiums in 2023 was at least 2.50%. In recent years during the low interest rate environment, the average net total return has always reached at least the level of 1.75%.
• A highly diversified asset mix: A well-diversified portfolio helps ensure stable growth and healthy cash flow, providing a balanced approach to a secure investment.

Branch 23: growth potential

• Investment flexibility: Branch 23 policies allow investment in a variety of funds without guaranteed returns, offering the potential for higher growth. Employers and employees can select funds based on their risk tolerance and financial goals.
• Professional management: Funds are managed by some of the world's best fund managers, ensuring optimal performance.
• Historical performance: Branch 23 funds have shown excellent historical returns. For instance, the Rainbow Green fund (50% bonds and 50% shares) achieved a 3.87% return over five years as of June 30, 2024.

On the AG EB Invest Dashboard, employers can monitor the performance of AG’s Branch 23 funds at any time.

Navigating the upcoming changes in Belgium's supplementary pension plans requires careful planning and strategic action. By understanding the new minimum return requirements and evaluating the best options for your organization's needs, you can ensure that your pension plans continue to provide valuable benefits to your employees while meeting the new regulatory standards. AG offers robust solutions across Branch 21, Branch 23, and Branch 44, ensuring a diverse range of options to meet varying risk appetites and financial goals. Stay informed, stay proactive, and choose AG for a reliable and high-performing pension partner.