Newsflash
Pensions

The Federal Pensions Service has determined the definitive salary ceiling for 2021 at EUR 63,944.74. An employee will not accrue state pension on his salary exceeding this ceiling. This salary ceiling will be significantly increased up to 2024. This increase could result in a decrease in contributions and even vested benefits in occupational pension schemes using the state pension salary ceiling to calculate the contributions or benefits.

Impact state pension

The state pension for single employees and two-salary households is calculated as follows:

60% x wage (ceiling) x 1/45 = pension accrual that year.

The total pension is then equal to the sum of the (revalued) outcomes of this formula for each year of employment. The pensionable salary is equal to all salaries subject to social security contributions (except double holiday pay).

However, the salary that is taken into account is limited to a ceiling. No (extra) state pension is accrued on the salary above that ceiling. The government decided earlier to raise these ceilings significantly:

  • 2021: EUR 62,684.50 (indexed up to EUR 63,944.74)
  • 2022: EUR 64,176.39
  • 2023: EUR 65,705.90
  • 2024: EUR 67,266.74

The amounts from 2022 onwards are not yet final as they are still adjusted annually in January based on the evolution of the health index. This health index amounted to 154.172 last year (basis 1996), which results in a final salary ceiling for 2021 of EUR 63,944.74 (for the pensions taking effect in 2022).

Thus, the maximum state pension accrual for 2021 is EUR 852.60 (on an annual basis). This is more than EUR 50 extra compared to the maximum accrual in 2020. Raising the salary ceiling will result in higher state pension accrual for employees whose salary equals, or exceeds, the ceiling.

(Possible) impact on occupational pensions

In certain pension schemes, raising the state pension salary ceiling results in a decrease in contributions or even a decrease in vested reserves. It concerns the pension schemes that use the state pension salary ceiling as one of the parameters to calculate contributions or benefits. The part of the salary below this state pension ceiling is generally referred to as “S1” and the part of the pensionable salary above the salary ceiling as “S2”. For example, a pension scheme may provide the following contributions:

3%S1+5%S2 = contribution.

Summarised, this “step-rate” formula implies that an employee whose salary exceeds the salary ceiling (S1) has a higher contribution rate on the part of his salary above the salary ceiling (S2). Employees with a pensionable salary at or above the state pension salary ceiling will be impacted by the increase in this salary ceiling. The concrete impact must be considered in relation to the plan design, but in summary, the effects are the following (for the same pensionable salary):

  • In cash balance schemes and defined contribution schemes, the future contributions will decrease. However, there is no decrease in vested reserves.
  • In defined benefit schemes which define the pensionable salary using a step-rate formula or deduct the estimated state pension to calculate the occupational pension (off-set formula), there may be a decrease in vested benefits (and corresponding AOP reserve). The future accrual could also decrease.

Concretely, an active employee will typically accrue less occupational pension compared to his accrual in case the salary ceiling would not have been increased up until 2024. This effect will be all the more pertinent for members whose DB scheme is “dynamically” administered, since they no longer accrue any additional service time.

The impact will be visible to employees on mypension.be and the annual pension benefit statement, which will also show the reserves for the previous year.

If, for HR reasons, an employer wishes to offset or mitigate the effects outlined above, consideration can be given to replacing the state pension salary ceiling with a conventional salary ceiling, which, for example, disregards the nominal increases up until 2024 and attempts to adhere to the earlier, usual evolution of the state pension salary ceiling. In DB schemes, the benefits vested in 2020 could be “locked” as a lower limit.

Whether and how these effects can be overcome must be considered in relation to the scheme design and the scope of the pension schemes within the company.

Finally, raising the salary ceiling could lead to the reduction of the margin within the 80% tax limit, even in schemes that do not take the salary ceiling into account, or already take a conventional salary ceiling into account.

Action point

Raising the salary ceiling for the calculation of the state pension may backfire in occupational pension schemes that define benefits or contributions based on this salary ceiling. For HR reasons, it is advisable to identify these effects and to determine whether and to what extent these effects can be overcome.