BRUSSELS - Sponsors of Belgian defined contribution plans will have to provide participants with a guaranteed investment return of around 3.25% starting next year, according to draft legislation expected to be approved by Parliament within the next month.
The new law is likely to require that, starting next January, all defined contribution plans will have to guarantee a minimum investment return over the time that the employee is a member of the pension plan.
The current draft of the Belgian law, which many local consultants say will change little before it is enacted, requires plan sponsors to provide a 3.25% return on employer contributions and a 3.75% return on employee contributions. Employee contributions, however, are expected to make up a very small portion of the total assets, so the real cost to the employer probably will be less than 4%.
The proposal has surprised and dismayed a number of Belgian-based consultants.
An initial proposal that the guarantee be met each year was rejected, said Koen de Ryck, consultant and founder of Pragma Consulting, Brussels. Instead, the guarantee will be calculated over the life of the account, according to how many years the member has been with the plan.
"The guarantee should not be provided; it will distort the investment process," said Mr. De Ryck.
It may encourage new pension plans to increase their allocations to fixed income and reduce investment risk, according to Marnik Van Impe, consulting actuary for Hewitt Associates, Brussels.
According to the latest figures from the Belgian Association of Pension Funds, at the end of 2000, local pension plans invested about 40% of plan assets in fixed income, 50% in equities, 4% in real estate and 6% in cash.
"Imposing investment guarantees is against the free investment policy. And if you follow it logically, it will reduce the benefits to the employees," Mr. Van Impe said.
The requirement also may have the unintended consequence of discouraging companies from providing pension plans if they are required to shoulder the investment risk, he added.
Ironically, the new proposal was designed to encourage greater provision of company pension plans by allowing industrywide pension plans and improving the tax treatment of plans sponsored by individual companies.
While over the long term the guarantee won't amount to much, Mr. Van Impe said that plan sponsors in industries with high staff turnover will be most affected by the new rule, as they will have to provide the guaranteed pension benefits when staff leave the plan.
"For companies that have high turnover in a year of poor investment returns, this guarantee will cost something," he said.
Support for guarantees
But Karel Stroobants, president of the Belgian Pension Funds Association, said Belgian employers support the guarantees. He said the requirement is unlikely to affect investment strategy, as the guarantees will be provided over the long term and are not an annual target.
"But a lot depends on how it will be implemented" by local pension regulators, he added.
The association is talking with local regulators about how the guarantees will be implemented and monitored, and expects guidelines to be published by mid-April.
At this stage it is not clear if other European governments will follow Belgium's example in a similar attempt to protect the rights of defined contribution plan participants.
Mr. De Ryck said this might be the case. He is concerned that politicians may decide to impose investment guarantees on defined contribution plans to protect pensions following the collapse of Enron Corp.
"The best protection would be to encourage diversification of investments," said Mr. De Ryck.
Companies across Europe increasingly are interested in reducing their business risks by moving away from defined benefit pensions, said Tim Reay, partner in the international employee benefits department of actuaries Bacon & Woodrow, London. Switzerland already requires all pension plans to provide a 4% annual return, although this law may be revised following two years of below-benchmark performance by local pension plans (Pensions & Investments, Feb. 18). The newly launched pensionfonds in Germany have to guarantee member contributions, although not a specific investment return. But this measure is designed more to attract people to the plans than to protect members' rights, said Mr. Reay.
The use of guarantees in defined contribution plans will depend on the importance of company-sponsored pension plans in each European state, he said. In Germany and Italy, state pension benefits are still relatively generous. But in countries where there is greater reliance on company plans, such as the Netherlands, a populist government may be tempted to impose guarantees to protect members' pension rights, he added.