Branch 21 group insurance - Maximum guaranteed rate for insurers: 2%
On 3 February 2016, the maximum reference rate that insurers can guarantee for branch 21 group insurances was published in the Belgian State Gazette. The maximum guaranteed rate was set at 2% by the Minister of Economy. This is 0.5% more than the maximum guaranteed rate proposed by the National Bank of Belgium (NBB).
This decision means that insurers may still insure a maximum guaranteed rate greater than or equal to the AOP (Act on Occupational Pensions) mandatory return.
It is not yet certain if the insurers will act accordingly and increase the historically low interest rates.
Most of the pension commitments that are managed by insurance companies are funded through a branch 21 insurance. With such a product, the insurer guarantees a return on the contributions paid. On top of this return, a profit sharing may be granted.
To guarantee the financial health of insurance companies, this guarantee is limited by law. Until the end of 2015, the maximum guaranteed rate was 3.75%. In practice, for some years, the current insurers’ guaranteed rates have been substantially lower.
The maximum guaranteed rate is in principle set by the NBB, but the Minister of Economy may decide otherwise by Ministerial Order (MO).
As of 1 January 2016, the NBB had set the maximum guaranteed rate at 1.5%. The Minister has now increased this guaranteed rate to 2% by MO dated 20 January 2016.
With this MO, the Minister wished to ensure that employers would not lose the incentive to conclude group insurance contracts. Still, the maximum guaranteed rate that was suggested by the NBB was 0.25% lower than the currently applicable AOP mandatory return.
At the beginning of this year, we informed you of this AOP mandatory return in our Pension wake-up call . For the active scheme members, this mandatory return equals 1.75%. If the insurer’s effective return is not sufficient to cover the mandatory return, the employer must make up the difference. If the insurer’s guaranteed rate is lower than the AOP mandatory return, in some cases, this may lead to additional balance sheet provisions.
As a result of the Minister’s intervention, it is still possible for insurance companies to offer a guaranteed rate equal to, or higher than, the AOP mandatory return. The current guaranteed rates of many insurers are however fundamentally lower than 1.75%. Thus, it is not yet certain that the insurers will apply the Minister’s increased rate or that the historically low annuities will approach the AOP mandatory return.
> Action point
Check what the guaranteed rate of your group insurance is and if it impacts the balance sheet provisions of your company.