Camille Van Vyve
14 Mar 2024
Group insurance: is the guaranteed return a poisonous gift?
In Belgium, group insurance, this form of pension savings taken out by an employer for its employees, is subject to a guaranteed return rule which currently stands at 1,75%. Good or bad thing?
An essential complement
Group insurance and pension funds constitute what is called the second pillar of employee pensions. These are essential tools to supplement the statutory pension, paid by the state. Given the demographics and constant politics, it is estimated that the latter should reach its lowest level around 2060 at about 1.000 euros per month - just above the poverty line.
Guarantee level too low
In its very formulation, the "guaranteed return" sounds like a bargain. However, although the intention is laudable, the level of this guarantee - 1,75%, below the European inflation target of 2% - does not support the initial ambition which is to boost Belgians’ capital in order to secure their old age.
An unequal principle
By being applied only to supplementary pension products for employees and laborers, this guarantee also contributes to inequalities between workers. Self-employed persons and company directors do indeed have the freedom to invest their supplementary pension in the products of their choice, in particular equities, offering a return of more than 1,75% in the long term.
Bad incentive for employers
The guarantee being the responsibility of the employers, who must make up the difference if the 1,75% return is not achieved, does not in any way encourage them to invest workers' money in riskier products such as stocks. However, group insurance contracts are by definition concluded for the long term and are therefore not very sensitive to stock market volatility.
A gift for the state
As a result, a substantial part of the amounts are invested in Belgian debt through government bonds: a gift for the government more than for the workers, which are thus deprived of the market return.
Pension reserves multiplied by 5
Imagine that all Belgians are free to invest their pension capital in the most profitable long-term products, such as stocks. Rather than 1,75%, it is a potential return of around 6% that workers could get on their supplementary pension. And with the magic of compound interest - this exponential growth effect due to the reinvestment of interest and dividends year after year - all Belgians under 55, regardless of their current salary level, would see their reserves at least double compared to the current situation. The youngest, who will probably receive a smaller legal pension in 40 years, could even see their reserves quintuple under this assumption.
Act before the reform
With the elimination of the guaranteed return not being on the political agenda for the moment, the only way to obtain higher returns and boost your pension capital is to act individually. Allocating part of your savings to pension objectives, taking advantage of long-term market returns, makes it possible to compensate for the differential between the last income and the sum of legal and supplementary pensions, which may not be sufficient.
Minimize the risks when approaching pension
However, building an investment portfolio for the pension should be done with caution. The bond portion of the portfolio can thus be judiciously increased as the pension approaches, in order to minimize the risk of fluctuation when the portfolio materializes. A construction with payment of a monthly annuity is also possible and allows you to maintain your standard of living while continuing to grow part of your capital. Easyvest can help you with these steps, thanks to its passive investment approach which we believe is the most profitable over the long term.
Note: This article was written when Easyvest was authorized and regulated by the FSMA as an agent in banking and investment services.