This spring, we had the pleasure of hosting Pierre Devolder at our AG Campus. As a professor of actuarial science and finance at UCLouvain, he tests the impact of our efforts to accrue a supplementary pension. He also studied whether the 3% contribution target recommended by the government is sufficient to absorb the pension shock.
His findings are quite stark. Apart from the fact that the 3% target is only attained by a quarter of Belgian employees, this percentage contribution has only a limited impact and even then, only if the employees contribute for more than 40, 35 or 30 years.
The example that Professor Devolder cites, speaks for itself (video spoken in French, subtitles in Dutch):
- spends 45 years
- contributing 3% of their annual salary to their group insurance plan
- at a real return of 0.75%
- and their life expectancy is 22 years on the date of retirement …
… we get a replacement rate of 7.9%
(a 1% contribution gives a replacement rate of 2.6%).
This means that your employees need to consistently contribute over a substantial period of time to achieve a replacement income of almost 8%. The replacement rate, or the replacement income, is the ratio between the pension payment and the last salary payment received.
But is an 8% increase enough?
Let’s face it: an additional 8% replacement income on top of the minimal state pension is not enough to have as comfortable a life later as now. If we are ambitious, we would be better off aiming for a total replacement rate of 80%: 50% state pension (first pillar) + 20% supplementary pension (second pillar) + 10% individual investment (third pillar).
So how much would an employee have to contribute to reach that 20% in the second pillar? Ideally 7.5%. The 3% target is therefore certainly not a maximum figure, but rather a good start.
“Not one single income group achieves a
replacement rate of 70% or more with the current
average contributions to supplementary pensions.”
Director Employee Benefits at AG Insurance
What about higher earners?
You might assume that those with higher incomes will have a comfortable retirement, given that they contribute the most to the second pillar in absolute terms. But make no mistake: they will be faced with the pension shock too.
For higher earners, a step rate formula is usually used to determine the contribution. That means that the contribution is made up of two parts: a contribution on the part of the salary up to the threshold used for the calculation of the state pension (S1), and a slightly higher contribution on the salary above that threshold (S2). After all, for the part above that threshold, there is no state pension provision.
An example of the step rate formule: 3% S1 + 9% S2
For higher salaries, the supplementary pension will only partly succeed in compensating the lower replacement rate of the state pension. This can be seen clearly from the graph below:
Don't delay any further.
Do you want to know if your pension plan suffices to offer your employees a comfortable replacement income later on in life?
Your usual AG contact will gladly take the time to find the right formula with you. You can choose between our branch 21 and branch 23 solutions, or a combination of the two.