Employee Benefits
AG EB ONLINE
Published on 30/11/2021
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Higher earnings cap may result in lower supplementary pension benefits
The Belgian federal government has decided to raise the earnings cap, which mainly impacts higher incomes: those who earn more than the current cap will be entitled to a higher state pension. But as a side effect, an increase in this cap may result in lower contributions to supplementary pensions.
The Belgian federal government has decided to raise the earnings cap, which mainly impacts higher incomes: those who earn more than the current cap will be entitled to a higher state pension. But as a side effect, an increase in this cap may result in lower contributions to supplementary pensions.
This detail has remained somewhat under the radar, but as part of the federal government's current pension reform efforts, two measures have already been approved: an increase in the minimum gross monthly pension to €1,585 and an increase in the earnings cap. While the increase in the earnings cap was designed to enhance state pension benefits, it can’t be seen in isolation from supplementary pensions.
The earnings cap essentially puts a limit on the size of the state pension that higher earners can collect. The federal government is raising that limit, and it will mainly impact higher incomes: employees that earn more than the current cap will be entitled to a higher state pension. For incomes below that cap, nothing will change. In 2020, the earnings cap was set at €60,027 per year (gross), i.e. a gross monthly salary of roughly €4,600. In total, the government's plan is to increase the earnings cap by 12.06% by 2024, not including inflation-adjusted indexation. The following are the estimated earnings caps for the coming years (not including indexation based on the pivot index):
- 2021: €62,684.50 gross annual salary for pensions as of 2022.
- 2022: €64,176.39.
- 2023: €65,705.90.
- 2024: €67,266.74.
While this sounds like good news, there's a catch, especially for supplementary pensions that accrue through employer contributions. For many employees, the calculation for premiums paid into the supplementary pension is also linked to the earnings cap. This means that an increase in the earnings cap may result in lower contributions to the supplementary pension. And for employees that are just starting out, the increase of the state pension made by raising the earnings cap may ultimately lead to a loss in purchasing power via the supplementary pension.
Supplementary pension contributions are typically calculated based on two tranches: a fixed percentage of the salary below the earnings cap (S1), and a higher percentage of the salary above the earnings cap (S2). On average, the first percentage is around 3% and the second around 8%. If the earnings cap increases, the tranche calculated at 8% becomes smaller, which in turn reduces the total contribution to the supplementary pension.
In short, for some employees, the increase in the earnings cap could be more of a curse than a blessing. AG is working on finding the best long-term solution to this issue. Be sure to contact your contact person for additional information.
Supplementary pension contributions are typically calculated based on two tranches: a fixed percentage of the salary below the earnings cap (S1), and a higher percentage of the salary above the earnings cap (S2). On average, the first percentage is around 3% and the second around 8%. If the earnings cap increases, the tranche calculated at 8% becomes smaller, which in turn reduces the total contribution to the supplementary pension.
In short, for some employees, the increase in the earnings cap could be more of a curse than a blessing. AG is working on finding the best long-term solution to this issue. Be sure to contact your contact person for additional information.
