Increase of the employer return guarantee on occupational pensions

As of 1 January 2025, the employer return guarantee on occupational pensions will increase to 2.50%, after having remained stable at 1.75% for the past 9 years. What triggered the increase of the return guarantee and what will be the impact of the increase on employers, employees and insurance companies?

Reminder: what is the AOP return guarantee?

Upon introduction of the Act of 28 April 2003 on Occupational Pensions (“AOP”), the legislator introduced a protection against the investment risk incurred by plan members on their occupational pension reserves. This protection, the AOP return guarantee, applies during active affiliation to employer contributions in defined contribution and cash-balance plan-type occupational pension plans and to employee contributions in all three types of pension plans (defined benefit, cash balance and defined contribution).

The minimum protection means that plan members at least have a right to the capitalisation of contributions at a certain minimum return. Since the amendment to the AOP at the end of 2015, the interest rate of the AOP return guarantee is variable and is calculated annually by the FSMA based on the average return over the past 24 months of Belgian government bonds with a duration of 10 years.

Due to the persistently low yields on Belgian government bonds, the AOP return guarantee was 1.75% for many years. The rise in government bond yields over the past 2 years already indicated that an increase in the AOP return guarantee was imminent. In August, the FSMA officially announced the new interest rate of the AOP return guarantee on its website: as of 1 January 2025, the interest rate will be 2.50%.

Impact for plan sponsors, insurance companies and pension funds

The consequence of this increase is that in the future, plan sponsors (employers and industry-wide plan sponsors) will have to guarantee a higher minimum return on future contributions and, depending on the calculation method of the return guarantee, on the accrued pension reserves. In other words, if the insurance company or the pension fund fails to grant an average return (including profit sharing) of 2.50% as from 1 January 2025, there might be an underfunding of the AOP return guarantee for that period. If so, the plan sponsor will have to pay an additional contribution to cover the underfunding of the AOP return guarantee.

Consequently, insurance companies will be inclined to revisit the contractual return they guarantee on future contributions and, as the case may be, on the accrued pension reserves, in order to remain competitive. Pension funds might need to amend their investment strategy in order to increase the chances that the return of the pension fund is able to cover the AOP return guarantee.

The AOP return guarantee still does not have to be permanently funded. The plan member can only require the plan sponsor to pay an additional contribution if there is an underfunding of the AOP return guarantee at any of the following moments:

• At the moment of pay-out upon retirement;
• At the moment of exit of the pension plan, when the plan member chooses to transfer the reserves to a welcome structure or to the pension institution of a new plan sponsor;
• At the moment of termination of the occupational pension plan.

The increase in the AOP return guarantee does not necessarily mean that the cost of the supplementary pension plan for sponsors will increase in the future. The evolution in the financial markets over the past 2 years means that pension institutions have also been able to invest in products that yield higher returns, which in principle will also bring their returns closer to the new interest rate of 2.50%.

Impact for employees

Employees will be positively impacted by the increase of the AOP return guarantee as it provides an increased protection of their accrued pension reserves against investment risks. Employees will also see a faster increase in their occupational pension reserves as from 1 January 2025 because the plan sponsor has to guarantee a higher minimum return.

Key takeaway

Employers and industry-wide plan sponsors should take into account the new interest rate of the AOP return guarantee when calculating their occupational pension liabilities. It is also advisable to check whether the pension institution to which they have entrusted the management of the occupational pension plan (insurance company or pension fund) is able to cover the AOP return guarantee for the future.

Author: Cédric Bruyninckx