Equalization of self-employed and employee pensions: what are the consequences for your IPT?

Self-employed people have always received a lower pension than employees or civil servants. This is a historical fact. There was even a time when self-employed people who had sufficient means of subsistence, for example because they owned their own home, received no statutory pension or only a very limited one.

The correction coefficient: the main reason for the lower self-employed pension.

Over the years, the calculation method for the statutory pension of self-employed people and employees has largely been aligned. Yet the self-employed pension is still so much lower. This had its reasons...

Self-employed people indeed pay a lower social contribution for the statutory pension. This is because the employer pays a social contribution for the employee's pension. That contribution by an employer is of course absent for self-employed people. So the legislator found it appropriate to provide for a correction mechanism.

From 1984, the so called correction coefficient was therefore introduced, which reduces the income taken into account for calculating the self-employed person's pension. As a result, the final pension amount received by the self-employed person is also reduced.

The correction coefficient has, however, evolved slightly over the years:

A correction coefficient of, for example, 0,691542 means that the proportional pension of a self-employed person comes out 30% lower than that of an employee with a comparable income.

The equalized self-employed pension: well done, but it will be a delayed celebration.

The bill that was passed on 3 June 2021 provides for the abolition of that correction coefficient. This creates an equalization in pension accrual between employees and self-employed people. The new pension calculation applies to pensions that take effect from 1/1/2022.

Well done! But does this mean that from 2021 the pension of self-employed people will rise by 30%? Not quite. So leave the party streamers in the closet for a few more years. The income from previous years on which the pension is calculated indeed remains subject to the old correction coefficient. Read: the pension of the self-employed person is gradually being aligned with that of employees. And you can really take "gradually" quite literally. Only within 45 years will a self-employed person and an employee who start their careers today and maintain the same salary throughout their entire career actually receive exactly the same statutory pension.

The impact on the supplementary pension? This is still unclear.

When determining the maximum supplementary pension capital that can be built up via an IPT, we use a calculation that we call the "80% rule". This calculation takes the statutory pension into account. The rule is: the higher the statutory pension, the less supplementary pension can be built up. Because we never know the statutory pension exactly in advance, we have been allowed, since 1987, to apply a very pragmatic method (note Massard, Circular no. Ci.RH.243/376.395 dated 04.02.1987 and the Income Tax Code article 59. § 1. 2° WIB92). This means that, to this day, instead of the actual pension we may use a "GWP" or "Estimated Statutory Pension". This is done via a simplified calculation based on a table of minimum and maximum pensions.

But... it is to be expected that if the actual pension for a self-employed person rises, then the estimated statutory pension will also rise. And this could result in the maximum supplementary pension that can be built up decreasing. The impact is difficult to assess at this time, because this depends on additional regulations that we expect in the coming months. What are, for example, possible scenarios?

- Are we heading towards a soft approach?

Do we keep the current calculation, in which the GWP of the self-employed in the table is corrected a little each year in the direction of the GWP of employees? This would mean a gradual transition. - Or do we go for the hard approach?

Where the tax authorities would already now assume the GWP of employees? Building up a (supplementary) pension is, after all, a long term project... so why not assume the future reality? This would mean an abrupt transition. - Or will it be a smart approach?

This could, for example, make use of the estimates of the statutory pension as already visible today in MyPension. But what if that estimate is not available in MyPension? For example a mixed career where the estimate is not yet complete due to the absence of an estimate of the civil servant pension? And what about a change of social status? It could be that you recently changed from employee to self-employed status, and where the estimate of your statutory pension still assumes an employee career for the first year. Furthermore, there is also no history of such estimates available. How can you then, as a citizen, prove during a tax audit in, say, 2024 that the amount you found in MyPension in 2022 had a certain order of magnitude? And finally. Can we, as an intermediary (and I refer to the situation with the RIZIV (the national health and disability insurance institute) contracts for the medical professions), obtain a mandate from our clients to consult their MyPension data? So that we can properly fulfill our duty of care. In short. However impressively good MyPension already is, the smart approach nonetheless seems like a very difficult path in the short term... - Or do we go for a complete "overhaul" of the fiscal 80% rule?

Due to a recent report from the Court of Audit, the taxation of supplementary pensions is a fairly sensitive topic. Statistics show that, through the optimization of self-employed people's income via supplementary pension, a very unequal distribution of accrued reserves in the 2nd pillar arises. For a small group of self-employed people, the supplementary pension apparently is more about wealth accumulation than about supplementing a statutory pension. In itself there is nothing wrong with this if it happened within the application of current fiscal rules of the game. - Or will something else entirely come out of it?

The future will tell. In any case, we will keep you, as clients, informed of further developments in this area.

A final thought: the baby and the bathwater.

First of all. Contrary to what the Court of Audit report suggests, we notice relatively little of that enormous wealth accumulation via the 2nd pillar in our practice. Our anecdotes are of course not data. But it is not our experience that every self-employed person has, without any problem, saved up enormous pension capital by the time of their retirement. Many save less than what large groups of employees receive paid out as group insurance. And the self-employed person, with their average statutory pension of € 911 per month, still lags far behind the employee (average € 1.267) and the civil servant (average € 2.600). As we showed above, this inequality will only be resolved within a few decades. Encouraging self-employed people to build up supplementary pension is sorely needed.

Secondly, insurance companies also no longer queue up to bring in just any savings contract. Their appetite for Branch 21 policies, short term contracts, and contracts with small premiums is low to non existent. Matching supply and demand, while taking care of the client, is nowadays specialist work.

Related to this, underwriting an insurance contract for supplementary pension has long since stopped being a "five minute job". Not only because of the complexity, but also because of the many compliance obligations that must, rightly, be complied with. As a result, extra efforts have to be made by the insurer, the intermediary, and not least by the end client. This is often a barrier for the end client when it comes to taking out supplementary pension.

Finally, we notice in practice that supplementary pension is not attractive enough for a growing group of self-employed people. This runs directly counter to the common perception of supplementary pension. That lack of attractiveness originates from various reasons, in the best case of an administrative nature, or because of time pressure. Unfortunately increasingly because self-employed people are presented with other fiscally attractive alternatives. The IPT is still fiscally very attractive, but nevertheless alternatives are chosen that may be less attractive, but that play out in the short term. Where the IPT precisely represents a promise for a distant future, choosing the short term has a very important advantage for many self-employed people: the risk of a fickle fiscal framework in the long term is thereby removed. This too is an important barrier for supplementary pension. With that, we put our finger on the sore spot...

To bridge that gap, supplementary pension would need to become precisely more fiscally attractive than it already is now. A second condition is that the fiscal framework within which this supplementary pension operates remains crystal clear, and is anchored for the long term. A supplementary pension indeed has a societal role to play. It is about protecting the family by combining supplementary pension with the necessary coverage for death and disability. And it is certainly also about safeguarding the next generation from the pension burden of the current generation.

It now remains to be seen what the next circular from FPS Finance will state. Life Experts will certainly follow this closely and keep you informed.

The bathwater may well be refreshed now and then. But let's not throw out the baby.