Which group insurance investment strategy to follow?
The National Bank is predicting an inflation rate for 2022 of about 5%. However, this high rate is expected to decrease again as energy prices normalise and global supply and demand curves become more aligned. Due to the rapid recovery of the economy after the first corona waves, the demand for means of production and raw materials was (or is) much greater than the available supply.
On the other hand, despite the increases last year, long-term interest rates remain historically very low. The danger is therefore not inconceivable that in such an environment, investment results will be lower than inflation and as a result the real value of the investment portfolio will erode.
For supplementary pensions, in addition to this possible impoverishment issue, employers are legally obliged to guarantee a minimum return on the pension reserves in a defined contribution plan. This minimum employer’s guarantee, which is linked to the evolution of the yields on government bonds, has been equal to the minimum percentage of 1.75% since 2016.
The interest guarantees offered by insurers, on the other hand, have continued to fall for decades, and since the last cuts, the market has fluctuated between 0% and 0.50%. The actual guarantees are often even lower if we consider the management costs on the pension reserves, corresponding to a negative return.
Even if the yields on government bonds and other long-term fixed-rate investments were to rise again, thus creating a margin for increasing the interest rate guarantees, we do not expect an immediate increase in these guarantees from insurers due to the high cost of the additional solvency margin to be imposed.
Since the stock exchanges have performed strongly in recent years, this seems to be the solution to the problems outlined via the so-called “Tak 23” investments. The pension reserves are then invested in investment funds, and the returns achieved are fully allocated without any return guarantee. Unlike investments in Tak 21 with a (limited) return guarantee, returns in Tak 23 can therefore be negative in certain years, but the expectation (hope) is to achieve higher returns in the long term that exceed inflation, so that there is no loss of purchasing power. In addition, the probability will increase that the returns achieved are greater than the minimum employer guarantees, so that there are no additional costs for the employers. Moreover, insurers do not provide interest guarantees in Tak 23 products, which lowers their solvency costs. Only winners then with Tak 23?
According to investment theory and the expected, higher return on investments with risks (equities) in the longer term, this reasoning is certainly correct for pension reserves, which by definition are always long-term investments. However, the theoretical, global approach and the concrete approach for an existing pension plan of a particular employer does not always (fully) correspond.
Firstly, the current Tak 23 offerings on the market differ greatly between insurers. The choice of possible investment funds, the guidance and advice tailored to the customer, the information and reporting on the investment results are just a few essential elements that have been extensively developed by some insurers, while for others such services are still in their infancy or even non-existent. In view of the complexity of Tak 23, its introduction at some insurers is also limited to pension plans with a minimum size.
In addition, there are the existing interest guarantees from the past. Usually, the old, high-interest guarantees (4.75% before 2000 and 3.25% before 2010, gradually decreasing thereafter) remain vested until the end of the pension contract and the new, low-interest guarantees only apply to future contributions. Sometimes, however, the old, high interest guarantees also apply to the future premiums for ‘old’ contracts. Depending on the insurance contract and the length of membership of the employees, the average interest guarantee can therefore differ greatly (in an ‘old’ population, a large part of the future premiums can still have guarantees of 3.25; for a young start-up company, the guarantees on future premiums will be limited to less than 0.50%). Naturally, the type of contract and the structure of the workforce will also determine whether a possible switch to Tak 23 is opportune. These elements can also determine whether the existing accrued reserves should best remain in Tak 21 while retaining the old interest guarantees or better also be transferred to Tak 23, together with the future premiums.
Finally, in the comparative analysis of possible returns between Tak 21 and Tak 23, not only the interest guarantees are important, but also the possible profit sharing that insurers can grant in addition to the guarantees based on their actual investment results. Estimating possible future profit sharing is very difficult. After all, who can predict the future? However, we sometimes receive additional information when insurers run into financial difficulties. In such cases, the pension institution is placed under the supervision of the National Bank because the solvency margin is insufficient. We may therefore assume that no profit sharing may (or can) be granted in the coming years and the total return in Tak 21 will be limited to the (low) interest guarantees. This scenario recently occurred at Integrale. Under the supervision of the National Bank, they were obliged to withdraw the profit sharing granted for 2019 and to significantly reduce the interest guarantees. On 15 December 2021, Integrale’s insurance portfolio was then transferred to Monument Assurance Belgium. Hopefully this transfer will provide certainty regarding the accrued pension rights at Integrale, but it seems unlikely that the new owner, which is required to normalise the solvency margin with its own funds, will grant much additional profit sharing in the coming years.
In summary, it seems a useful and interesting exercise to analyse your existing pension contracts in the course of 2022 to determine whether a switch to investment funds in Tak 23 might be opportune, either for all employees or only for new employees (with only low interest guarantees).
We wish you a happy holiday season!!!