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Payment of group insurance capital or annuities, is there anything to worry about?

Media outlets recently announced potential issues regarding the payment of capital or annuities from group insurances.

Do we need to be worried?

First and foremost, it regards Defined Benefit retirement plans. In the past, many employers have indeed made the decision to phase out their Defined Benefit plans. This could either be attributed to its delicate financial nature, which makes it more difficult to budget or, with regards to the HR department, its lack of dynamism. The latter cannot be overlooked as such plans were created with the philosophy to bind employees to their employers for the whole duration of their career. Meanwhile, a lot of companies have already terminated these plans (for new memberships) or made the switch to a Defined Contribution plan for the whole insured population.

So wherein lies the problem?

Potential underfunding is not new. However, historically low interest rates are increasing the underfunding issue in today’s environment. In a lot of cases, the only way to reach the defined ‘goal’ is by more funding.  For Defined Benefit plans, the return obtained determines the cost for the employer. It is typical for such plans that a significant salary increase after a reasonable affiliation period results in an important capital increase, to be financed in the short term.

Are employees at risk?

Employees are still protected by legal provisions that group insurances are subject to. In some cases, this protection reaches beyond what is legally provided for savings on bank accounts. The bankruptcy of the company could cause underfunding, but this in no way means that the available savings cannot be paid out to the beneficiaries. Besides, the employer is obliged to externalise the complementary pensions to a pension institution like a group insurer or a pension fund. This externalisation protects the complementary pension rights of the employees in the event of bankruptcy of the employer. In addition, the employer will be responsible for the payment of the pension capital if the pension institution is unable to pay the full amount.

Are there any solutions for employers who have subscribed to Defined Benefit plans?

Structural adjustment is possible, but not always realistic… Defined Benefit plans are generally cherished by the employees, especially in cases of high seniority, as this benefit is an integral part of their salary conditions. Moreover, structural change in companies with a blue-collar population could lead to an acceleration of the process under a single employment status.
Nevertheless, there are still less drastic options and possibilities that could efficiently solve the problem:
  • A thorough analysis of the current cost structure;
  • Terminate the current plan and initiate a new one for new employees (just a heads up: all employees have the right to subscribe to this plan);
  • Changing the type of funding: for example, from Branch 21 to Branch 23, or go from individual to collective capitalization. 
In the past, the majority has opted for a Defined Contribution plan. Whatever decision you wish to make, it is important to measure the funding rate regularly and to adjust wherever necessary if the current parameters don’t appear to be realistic anymore. Also after closing your Defined Benefit plan for new entries, it is important to follow up the financing carefully.

Do these plans hold any risk?

Belgian employers are obliged to guarantee a minimum return of 1,75%. Taking into account the current returns (in Branch 21), the minimum return often cannot be achieved. A thorough analysis of your current plan is also necessary here.

If you would like to receive more information or rather an appointment, don’t hesitate to contact our Employee Benefits team!

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