What is the statutory return guarantee on group insurance?

This article is aimed at organisers with a company-related pension commitment. For simplicity, below we replace “organiser” with “employer” and “pension commitment” with “group insurance”. In other words: this is about employers who offer group insurance for salaried employees.

Moreover, we also assume for now a classic group insurance with a fixed interest rate (a so-called Branch 21 plan) with a fixed contribution (what we call a “DC plan” or a “Defined Contribution plan”). A “fixed contribution” means that the employer's promise to the employee is expressed in the form of an annual premium.

Below we also talk about “sleepers”. In this context, a “sleeper” is an official term for a former employee who, for example, after leaving the firm left their savings reserve under the plan of their former employer. No active contribution is paid any longer for this member, but their savings remain subject to the contract that their former employer concluded with the insurer. As a counterexample: persons who have placed savings reserves from a previous employer under a so-called reception structure are by definition not sleepers, because their reserves no longer fall under the contract that their former employer concluded with the insurer.

Now that we have this out of the way...

When an employer takes out group insurance, it takes on a number of obligations. Suppose, for example, that the employer promises to pay 4% of each employee's annual remuneration into a pension plan every year. In that case, that employer must first and foremost “externalise” that obligation. That is to say: he may not start investing that amount himself and thus save it up for his employee. He is obliged to knock on the door of an insurance company with his promise and ask whether that insurance company, in exchange for payment of a tax-deductible premium, is willing to carry out that promise for him. That insurer will then grant an interest rate on the payments the employer makes for his employee. But that is not the end of it. Strikingly, not only the insurer but also the employer must ensure that this payment achieves a minimum return. As a result, an employer indirectly makes two promises: not only does he promise to pay a certain amount for his employee, but he also promises that this amount will achieve a certain return. And although the insurer already provides a return, it is ultimately the employer who is responsible for it...

How did this regulation come about?

It may seem strange that, as an employer who takes out a pension plan and already takes on significant financial commitments in doing so, you saddle yourself with yet another obligation without properly realising it. How does that happen? Well, in Belgium a level playing field is ensured when it comes to supplementary pensions. Whether you are a large sectoral organiser (e.g. the metal sector) offering a sectoral plan in the form of its own pension fund to several tens of thousands of workers, or you are a small SME with 10 staff members offering group insurance to its employees through an insurer: the same rules apply to both organisers. And those rules simply also include a return guarantee.

In plain language, what is the statutory return guarantee?

Put briefly, it currently stands at 1.75% after accounting for a maximum of 5% in costs.

An example. Suppose that on 1 January 100 euros is paid (net, i.e. after deduction of taxes) into Piet's policy; then on 1 January of the following year Piet's savings pot with the insurer must contain at least this amount:

(premium 100 x ( 1 - 5% maximum costs )) x ( 1 + 1.75% minimum return )

= minimum reserve end of first year 96.66 euros

Piet stays employed, and so 100 euros is then paid in again, and so the following year in January the savings pot must contain at least:

((new premium 100 x ( 1 to 5% maximum costs)) + minimum reserve end of first year 96.66 ) x (1 + 1.75% minimum return)

= minimum reserve end of second year 195.01 euros

Legally, Piet's policy must contain at least 195.01 euros in reserve at the beginning of the second year.

Suppose the insurer now achieves an annual return of 2% two years in a row and charges a total cost of 4% on the premium, then Piet will find these reserves in his contract:

(100 x ( 1 - 4% actual costs )) x ( 1 + 2% actual return )

= actual reserve end of first year 97.92 euros

Piet stays employed, and so 100 euros is then paid in again, and so the following year in January the savings pot will contain:

((new premium 100 x ( 1 to 4% actual costs)) + actual reserve end of first year 97.92 ) x (1 + 2% actual return)

= actual reserve end of second year 197.80 euros

In this case the actual reserve is 197.80 euros and it should be at least 195.01 euros. The situation is OK, so there is no temporary shortfall (see below).

This percentage was initially set by law. The guarantee for employee contributions was initially 4.75%, but was lowered to 3.75% in 1999. The guarantee for employer contributions was initially 3.25%. Since 2016, the return guarantee is no longer set by law, but recalculated each year by the FSMA. The calculation is based on a formula that takes the interest rate on 10-year government bonds as its starting point. If the interest rate on government bonds falls, the return guarantee also falls. Conversely, the return guarantee rises when the interest rate on government bonds rises. The return guarantee must, however, be at least 1.75% and may not exceed 3.75%. The rate for the following year is fixed each year on 1 January. Since 2016, the statutory return guarantee has been 1.75%. Given the rise in the interest rate on government bonds, we may expect the 1.75% to rise on 1 January 2024. At the time of publishing this article, the new interest rate was not yet known.

What is the statutory return guarantee, in more detail?

If we go into a bit more detail, the statutory return guarantee corresponds to:

1. For employer allowances, the amount built up through capitalisation, at the interest rate(s) determined in accordance with the Act on supplementary pensions and published by the FSMA (being 1.75 % on 1/01/2018) of the employer contributions paid into it, reduced by the costs limited to 5 % of the contributions. 2. For personal contributions, the amount built up through capitalisation, at the interest rate(s) determined in accordance with the Act on supplementary pensions and published by the FSMA (being 1.75 % on 1/01/2018) of the personal contributions paid into it.

If, within the first five years after joining the plan, the member's withdrawal, retirement or payment of the benefits before retirement, or termination of the present pension commitment occurs, the capitalisation of the employer contributions provided above is replaced by an indexation, if this leads to a lower result. The indexation is carried out on the basis of the consumer price index of the salaries, wages, pensions, allowances and benefits, in accordance with the Act of 2 August 1971.

Please note: for sleepers, the employer is generally bound to a return of 0% on the reserves for the future. The insurer must nevertheless continue to grant equal returns to all members, whether sleepers or active. As a result, the sleeper's reserve will continue to grow while the former employer is bound to a zero return. This means that any temporary shortfall that existed at the time of leaving employment can still decrease during the period as a sleeper.

What is a temporary shortfall on the statutory return guarantee?

A temporary shortfall arises at the employee level if the reserve in the group insurance is lower than what should legally have been provided. Temporary shortfalls are calculated annually to ensure that the employer is not caught by surprise when the final shortfalls are determined. A final shortfall arises at the moment the reserves in the policy must be settled or transferred. For example, at retirement.

How is a shortfall determined?

1. On the one hand, in an employee's personal policy you have the build-up of the effective savings reserve (A). This is the part of the premium that is paid by the employer or employee and intended for pension build-up. The management costs are deducted from it (for insurer and intermediary, on average 3%). Then the interest rate is granted (say 1.60%). Then the profit share is granted (say 0.50%). 2. On the other hand, you have the calculation of the virtual reserve (B), namely the reserve that must legally be present at a minimum. This is the part of the premium that is paid by the employer or employee that is intended for pension build-up. From it, 5% is deducted in the case of an employer allowance and 0% in the case of an employee contribution. Then the legally required minimum return is granted, being 1.75%.

If A is greater than B, then there is no shortfall for that member at that moment (Piet's situation above).

If B is greater than A, then there is a shortfall for that member at that moment.

This calculation is done periodically by an insurer on the entire population of an employer and provided to the employer. For example, on 1 January 2024 there may be a shortfall of e.g. 500 euros for one employee, 300 euros for a second employee and 0 euros for the remaining 10 employees.

What if there is a temporary shortfall?

In the case of a temporary shortfall, the employer is asked to “make up” this shortfall. This means that the employer receives an additional invoice with the sum of all shortfalls in that year. The payment here does not end up in the employees' individual policies, but rather in a collective financing fund of the employer with the insurer. This is a kind of “savings account” that enjoys the same returns as the group insurance itself. In the above example, the employer will be asked to pay 800 euros into the financing fund.

What is a final shortfall on the statutory return guarantee? When does it arise? How is it handled?

A final shortfall can arise upon the member's withdrawal, payment at retirement or termination of the pension commitment. If there are shortfalls, these are first taken from the financing fund and then the employer is asked to make any still-missing payments before, for example, the settlement on account of retirement can proceed.

Who bears the cost of the return guarantee?

It will be clear from the above that the statutory return guarantee is borne by the employer. Both on the employer reserve and on the employee reserve.

How is the return guarantee calculated when the interest rate changes?

A change in the interest rate has a complex effect on the return guarantee. Moreover, there are two ways to calculate this: a horizontal and a vertical way.

- The horizontal way means that the new interest rate applies only to the new contributions and that the old contributions retain the old interest rate. - The vertical way means that the new interest rate applies to both the new and the old contributions, including their further capitalisation.

Pension plans managed by an insurer with a guaranteed return (Branch 21) usually use the horizontal way. Pension plans managed by a pension fund or by an insurer without a guaranteed return (Branch 23) usually use the vertical way.

What if I have a financing shortfall in my group insurance?

It is difficult to eliminate a historical shortfall. However, you can try to avoid future shortfalls. And if you approach it well, surpluses in the future may possibly also compensate for shortfalls from the past. This can be done by choosing the right Branch 21 insurer, monitoring the costs of the plan, and avoiding a personal contribution. Life Experts can help you with this. Depending on the premium volume and the complexity or simplicity of the supplementary pensions in your company, it may be advisable to finance your group insurance via a Branch 23 Cash Balance financing technique or a Hybrid DC Branch 21/Branch 23 financing technique. Neither technique holds any secrets for Life Experts. In this case, one tries to obtain higher potential returns by investing (partly) in funds. Depending on the technique chosen, you will also distribute part of the potential extra return among your employees.

A piece of good advice: reworking an existing group insurance with a view to eliminating future financing shortfalls is highly specialised matter. Contact our team for more information on the conversion of your policy.