Will your insurer still be able to pay out your company pension?
About two-thirds of group insurance policies that operate on a fixed schedule do not have sufficient resources to pay the promised amounts upon retirement. But insurers do not always timely notify the companies for which they manage the pension commitments.
The FSMA, the Belgian financial watchdog, has examined 217 defined benefit pension schemes managed by 14 insurers. These agreements guarantee that the members receive a specific sum of money when they retire.
The alternative is a defined contribution formula. With that type of pension commitment, no goal is agreed, but only a contribution to be paid. How much that yields depends on how long you save and what the return is.
In order to secure the sum of money for the fixed performances, a certain return on the reserves must be achieved. But group insurance policies should only invest extremely conservatively and, in the current market conditions for bonds, barely achieve a return. Based on a scenario in which the expected return is zero percent, 67.3 percent of the agreements could not meet the payment obligations in 2017.
Even in the short term, some life insurance companies will run into difficulties to pay out the so-called acquired reserves. Accrued reserves are the amount that an affiliate has already saved and can possibly withdraw to transfer it to the pension insurance of a new employer.
Based on figures for 2017, 18 percent of the schemes in the sample found a deficit against the statutory funding requirements. The FSMA does note that the funding level very rarely falls below 95 percent.
There are also group insurance policies that have a large buffer. In more than a quarter of the cases, the funding level is above 120 percent.
Reduction of fixed services
The FSMA has established that insurers are increasingly less offering fixed-benefit commitments to newcomers. The phasing-out has accelerated in recent years. According to DB2P, the Supplementary Pensions Database, on January 1, 2017, about one fifth of the acquired reserves – worth 11 billion euros – were managed under a group insurance policy with fixed benefits. These acquired reserves only relate to 10 percent of the affiliates. At the beginning of 2019, this had even decreased to 5 percent. New policyholders are now led to a formula with fixed contributions.
At half of the insurance companies, the calculation period for the deficits is far too long, the FSMA notes. In addition, communication between the insurer and the companies is often too lax. As soon as the insurer notices even the smallest funding gap, it must legally notify the company immediately. Now it sometimes takes months and in a few cases it does not even happen at all. This is essential, however, because the company must make additional payments if the pension insurance cannot meet its obligations to the employees. As long as your company does not go bankrupt, you can be sure of the sum you will receive when you retire.