The free additional pension for employees is a significant innovation for employers with one or more employees who do not benefit, or only benefit in a limited way, from an additional pension – and, of course, for these employees. This is the case primarily for private employers whose employees either do not benefit from a company-wide or sector-wide additional pension scheme or who benefit only from a limited company-wide or sector-wide additional pension scheme. It is also the case for public employers, whose public staff members working under an employment agreement could traditionally rely to a lesser extent on an additional pension accrual.
From now on, the Act of 6 December 2018 establishing a free additional pension for employees ("FAPE") offers such employees the possibility to accrue a second pension pillar, should they wish to do so. The employer can facilitate this accrual, should he so wish, but without the burdensome requirements that usually come with setting up and financing an additional pension through a group insurance policy or an IORP (institution for occupational retirement provision or pension fund).
Which additional pensions are we talking about?
The free additional pension for employees is a pension in addition to the legal pension. It is accrued on the basis of payments made by the employee under a pension agreement entered into between the individual employee and a pension institution. It is based on capitalisation. It can include a retirement pension and/or a survivor's pension (in case of death before or after the retirement age), which is paid out as a capital sum or as a periodic allowance. All of this is regulated in the individual pension agreement.
Starting when?
The Act of 6 December 2018 comes into force on 27 March 2019. Consequently, as of that date, the employee can enter into a pension agreement that is effective immediately. The employee will benefit from the favourable tax regime for the first time as of the 2020 tax assessment year, for the premiums paid in 2019.
For whom?
Any employee who works under an employment agreement is eligible. The nature and the duration of the employment agreement are irrelevant. Statutory public staff members not working under an employment agreement cannot benefit from an FAPE.
How does it work?
The FAPE functions in a way that is completely different from the additional pensions set up by the employer. The initiative lies entirely with the employee. The individual employee freely chooses whether or not he/she wants to accrue an additional pension. In this respect, the employee personally enters into a pension agreement with a pension institution (an insurance company or an IORP). The employer is not a party to this agreement.
For each accrual year, the employee himself chooses the amount of the premiums he wishes to pay, albeit within certain boundaries. The employee personally chooses if and when he wishes to terminate the further accrual of his FAPE.
The employee can personally verify his FAPE's accrual on the pension portal mypension.be, in the section dedicated to the additional (second pillar) pensions.
At any time, the employee can terminate the pension agreement with a given pension institution and enter into a new agreement with another pension institution, with or without transferring the accrued reserves.
Who pays the premiums?
The premiums are borne by the employee. The employer must withhold the employee's premium from the employee's (net) salary and pay it directly to the pension institution.
What is the amount of the premium?
The employee is free to choose how much he contributes. In this respect, he needs to take into account the statutory maximum amount. The underlying idea is that the FAPE should offer each employee an (extra) opportunity to accrue an additional pension based on premiums that do not exceed 3% of his remuneration. If an employee opts for an FAPE, he can contribute a minimum of EUR 1,600 (EUR 980, indexed) in 2019.
In this respect, for an employee receiving remuneration of EUR 100,000 the maximum premium will amount to EUR 3,000 (i.e. 3% of EUR 100,000); for an employee receiving remuneration of EUR 30,000 the premium will amount to maximum EUR 1,600 (as 3% is less than the minimum amount of EUR 1,600).
The reference remuneration used for the calculations is the total gross remuneration the employee earned during year N-2. Consequently, for the 2019 pension premium (year N) the 2017 gross remuneration will be relevant. Only the gross remuneration on which social security contributions were due is taken into account. This is the gross remuneration included on the employee's individual salary account.
The Act does not allow any form of "back-service" for possible (earlier) years of the career without any additional pension accrual or with only limited additional pension accrual.
What is the premium if the employee already benefits from an additional pension?
The maximum premium is 3%. If the employee benefits from other additional second-pillar pension schemes (i.e. additional pensions granted by the employer or at the sector level), then such pension accrual must be deducted from the maximum premium budget. The calculation method is set out by statute.
In this respect, the maximum premium in 2019 (year N) will amount to 3% of the gross remuneration in 2017 (N-2), minus the accrual of the pension reserves in the existing additional pension schemes in 2017. This accrual in 2017 is calculated by calculating the difference between (i) the reserves on 1 January 2018 (N-1) and (ii) the reserves on 1 January 2017 (N-2). N-2 is capitalised at a given interest rate, i.e. the average interest rate on Linear Bonds for 10 years calculated over the period from N-6 until N-1, estimated at 1.12%.
The employee can find the amounts of the reserves on mypension.be. We expect that the pension institution will make the calculation for the employee.
Only second-pillar pensions are taken into account for the 3% threshold. Third-pillar pensions like pension savings or long-term savings which are part of the third pension pillar are not included in the deduction.
What are the tax and other charges on the premiums?
The premiums are subject to a 4.4% insurance tax and lead to a 30% personal income tax deduction (provided the 80% rule is complied with). The tax deduction should be taken into account when calculating the personal income tax withholdings that must be deducted from the remuneration.
The premiums are not subject to the special contribution of 8.86%, since they do not constitute an employer's contribution.
What are the employer's obligations?
The employer has only one obligation, which is to withhold the employee's premiums from the net remuneration of any employee who notifies his wish to participate in the FAPE, and subsequently to pay these premiums to the pension institution of the employee's choice. Consequently, the employee should inform the employer of the withholding and its possible changes or termination at least two months before the implementation. The employee can make changes twice a year at most.
Consequently, the employer does not have to grant an additional pension and, moreover, the employer is not the legal organiser or sponsor of the additional pension. With an FAPE, the employer does not have the obligations imposed by the Additional Pensions Act, which – for the avoidance of doubt – does not apply here. That means no pension plan rules, no guaranteed return, no information or consultation requirements, etc.
What can the employer do to facilitate the FAPE?
The employer has the possibility, but no obligation, to enter into a framework agreement with the pension institution. Subsequently, employees then have the possibility, but again no obligation, to accrue their FAPE by entering into an individual pension agreement with that pension institution. But why would they do this? It could be, for example, because in that framework agreement the pension institution has agreed with the employer to apply a favourable return regime or an arrangement with respect to the administration costs.
When will the additional pension be paid?
The additional pension will be paid at the time of the employee's retirement. Consequently, payment takes place when he takes his legal retirement as an employee. If the pension agreement so provides, the additional pension can already be paid when the employee reaches the legal retirement age or when the employee meets the requirements for taking early retirement, in the event that the employee does not yet take legal retirement.
How much additional pension will the employee benefit from?
The employee will be able to follow the accrual of his FAPE via mypension.be. In addition, he must also receive an annual certificate from the pension institution.
The new Act contains hardly any provisions giving special protection to the employee. The return on the premiums paid will be as specified in the application for the pension agreement he has entered into with the pension institution. This agreement can contain result-committed obligations ("branch 21") stipulating that the pension institution must guarantee a certain result to the employee; it can also contain result-attempted obligations ("branch 23" or with an IORP) stipulating that the return depends on the investments, without any guarantee. Consequently, the employer does not have to guarantee any return. A Royal Decree setting out which underlying assets are allowed and which are banned will further determine the rules to protect participants and beneficiaries.
Consequently, the beneficiary will have to be careful about obtaining the necessary information about the rights and guarantees he is entitled to under the terms of the pension agreement.
The pension paid will be taxed at 10% in the event of payment at the time of retirement or at death. In all other scenarios, the tax rate will be 33%. A contribution to the National Institute for Health and Invalidity Insurance of 3.55% and a solidarity contribution of 0–2% will be withheld from the amount before payment.
Conclusion
Increasingly, the pension of the future will be the result of a DIY package: employees will design their own pensions as a combination of the legal pension(s), additional second-pillar pensions, fiscally regulated third-pillar pensions and, finally, all other forms of savings. With the FAPE, the legislator has added a new tool to the DIY package which can make a significant contribution to the desired final result: a pension that matters. The responsibility for making use of this tool is entirely in the employee's hands, however. Nevertheless, the employer can provide a certain amount of direction by entering into a framework agreement with the pension institution.