A Ministerial Decree of 20 January 2016 reduces the maximum reference rate for long-term life insurance from 3.75% to 2%. With this decision, and for the second time, the Minister of Economy has set aside a decision of the National Bank of Belgium to lower the rate to 1.5%. The draft "Solvency II" act makes this system more objective.
Background
In 2012, a decision by the National Bank of Belgium to lower the maximum technical interest rate (to 2%) was set aside by the Minister of Economy. The Minister maintained the maximum interest rate at 3.75%. The main reason for this deadlock was that the Act of 28 April 2003 on supplementary pensions imposed such a rate as a minimum rate for employers.
On 16 October 2015, the social partners agreed to lower the minimum reference rates of 3.75% (personal contributions) and 3.25% (employer contributions) to a single rate which may be adapted on 1 January each year depending on a percentage rate (65% for 2016 and 2017) of the average yield of the Belgian State's ten-year linear bonds during the last 24 months ending on the previous 1 June. This minimum rate may vary between 1.75% and 3.75%. This agreement was incorporated in an act of 18 December 2015 (see Eubelius Spotlights March 2016). Due to the current low rates, the minimum of the Act on supplementary pensions was fixed at 1.75% on 31 December 2015.
The Ministerial Decree of 20 January 2016
On 22 December 2015, the Bank decided, in accordance with article 19, § 2 of the act of 9 July 1975 on supervision of insurance companies (the "Supervision Act"), to lower the maximum reference rate for long-term life insurance contracts to 1.5%. For social reasons, the Minister set aside this decision but, by means of a ministerial decree of 20 January 2016, he set a new maximum reference rate of 2%. This rate came into force on 13 February 2016 (the decree was published in the Official Gazette on 3 February 2016).
The regime of the draft "Solvency II" act
A draft act submitted to the Chamber of Representatives on 13 January 2016 modifies the maximum reference rate system. This draft act implements inter alia the Solvency II Directive (Directive 2009/138/CE) and repeals the Supervision Act. This draft act was adopted by the Chamber on 18 February 2016. The new act will enter into force on the day of its publication in the Official Gazette (article 763 of the draft). Article 655 of the draft provides, as a transitional measure, that decisions made under the prior regime will remain in force as long as a new maximum reference rate has not been set.
Article 215 of the draft (implementing Article 209 of the Directive) states that "Premiums for new business shall be sufficient (...) to establish adequate technical provisions". The explanatory statement indicates that this principle aims "to prevent insurance undertakings from trying to gain market shares with dumping practices financed by own funds".
Article 216 of the draft describes the new system for the adjustment of the maximum reference rate. It replaces article 19, §2 and §3 of the Supervision Act and article 24, §2 to §4 of the Royal Decree of 14 November 2003 on life insurance transactions.
The maximum reference rate for life insurance operations (except for some operations that do not last more than 8 years) will be set objectively by the Bank on 1 January each year at 85% of the average yield of the Belgian State's ten-year linear bonds ("OLOs") during the last 24 months ending on the previous 1 June, the result being rounded to the nearest 25 basic points, with a minimum of 0.75% and a maximum of 3.75%. The Minister responsible for insurance has the power, by means of a reasoned decision, to block the modification of the reference rate.
Article 216, §3 adds that the new maximum rate will apply to all contracts concluded as from the entry into force of the new rate and, for prior contracts, to premium due as from the entry into force in so far as the future income for such new premium was not determined in the contract on signing, including the premium increases or any revision of the guarantee taking place after the entry into force of the new maximum rate.
Conclusion
The minimum rate of the Act on supplementary pensions and the maximum rate of the new Supervision Act will henceforth share a common objective reference: the average rate of the ten-year OLOs over a 24-month period. In theory, the minimum rate of the Act on supplementary pensions should remain below or equal to the maximum rate of the Supervision Act, but it cannot be excluded that, over time, the maximum reference rate of the Supervision Act will be set at a lower level than the minimum rate of the Act on supplementary pensions.
For 2016, the maximum reference rate of the Supervision Act is 2%. The minimum rate of the Act on supplementary pensions will be 1.75% for 2016 and 2017.