The puzzle of pensions is in good hands



Demographic change obliges all governments to address the issue of pensions. Prof. Pierre Devolder has just created the Ethias Chair of Excellence and, with other colleagues, an interdisciplinary Action de Recherche Concertée (ARC), or joint research project.

UCLouvain isn’t hiding from it: pensions have become a research priority. Actuary Pierre Devolder and attorney Alexia Autenne agree on the starting point: it’s a multidisciplinary subject. In 2014, they turned to the Fondation Louvain to help them fund a chair to address three priorities: recruit two postdoctoral researchers to study new mechanisms for public and complementary pension schemes; create a continuing education certificate in pension law and financing; and hold knowledge dissemination meetings (‘Pensions’ Mornings’) every two months for sector professionals. The initiative was funded by an endowment, however, which, like all endowments, eventually runs out. The Fondation Louvain and Profs Autenne and Devolder found another partner in the insurer Ethias, with which they have just created a chair of excellence on supplementary pensions (see Box 1).

‘In parallel,’ explains Prof. Devolder, who teaches actuarial science and finance and is a researcher at the Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA), ‘we set up a joint research project [see Box 2] as part of Louvain4ageing, expanding the scope of our future research. We designed it with two economists, Profs Jean Hindriks and Vincent Vandenberghe, and a philosopher, Prof. Axel Gosseries.’ Through the project and the Ethias Chair, UCLouvain's ‘pensions’ group now includes 15 researchers in addition to five academic project managers. This shows how urgent UCLouvain – especially through its Louvain4Ageing network – considers the general problem of ageing. ‘For the university, it's not just about academic research’, Prof. Devolder says. ‘There’s also an important societal message. We try to shed light on the future and answer questions posed by public authorities and the population.’ This involvement in society is further strengthened by the presence of Profs Devolder and Hindriks on the Academic Pension Committee, whose 12 experts who advise the government and social partners.

Fundamental change

The reason for all this turmoil concerning pensions is obvious: our systems were created after the Second World War; that world no longer exists. ‘We’re facing a fundamental structural change’, Prof. Devolder says. ‘Demography – ageing is just the beginning – career duration and pace, everything is changing!’

Is our system at risk because it’s tainted by an inherent financing flaw? ‘Yes and no,’ Prof. Devolder explains. ‘There are two ways to finance the system: allocation and capitalisation. After the war, the founders of our social security system chose allocation: today’s assets pay today’s pensioners; a direct transfer of money between generations. They could have chosen capitalisation: each generation saves for itself. The two sides clashed rather sharply. Advocates of capitalisation argued that everyone must be responsible; that we don’t leave debts to our children; that it allows for injecting money into collective savings. Conversely, those who defended allocation emphasised the essential need for solidarity in case of accidents, and the problems of inflation and financial calamity that undermined capitalisation systems between the two wars. I'm one of those who thinks you need a mix of both systems.’

SAS: a first-pillar project

This is why the joint research project’s goal is to develop a pension system that meets three sometimes contradictory objectives. First: financial sustainability. A pension system only makes sense if it can pay. Second: social adequacy. If the sustainable system leads to the poverty of the elderly, nothing will have been solved! It must be fair and equitable. Third: it must be guaranteed, especially at the legal level. System governance must be ensured. Hence the name of the project: Sustainable, adequate and safe, SAS.

Project researchers – from different fields, having different points of view – will first examine systems around the world (in the EU, for example, no two pension systems are identical!). Then they’ll build stochastic models based on risk analysis (demographic, financial, inflationary, etc.), but not median scenarios, which have been done to excess. ‘The average never happens’, Prof. Devolder likes to say. Finally, the data will be entered into these models in order to generate reliable simulations.

There are indeed many questions about our current system. Not the least is its unequal character. ‘Being based on a uniform retirement age, our system organises a transfer of money from poor to rich’, Prof. Devolder says. ‘All the studies show that richer, more educated people live longer than others and this difference is in years, not months.’ One way to resolve this contradiction would be to rely not on a uniform retirement age but on career length (the most educated, and thus most highly paid, usually start their careers later). This has already been suggested by the Academic Pension Committee but the SAS project will refine correlations between life expectancy, social level and education in order to model such a system.

Another reform target is the point system. This was a hot topic under the previous legislature, but social partners failed to reach an agreement. Addressing this criticism, especially concerning the value of points, Prof. Devolder offers a pension account expressed in euros, open for each affiliate (read about it in his article in the journal Regards Economiques).

Second pillar: annuity or capital?

Although the joint research project is mainly devoted to studies on the first pillar, the Ethias Chair is devoted entirely to the second pillar. Here too, many questions arise. For example, what is the impact of changes on the first pillar? What is the optimal level of sharing between first and second pillars? Should it be made mandatory as in the United Kingdom and the Netherlands? Should we extend it to civil servants as we began to do with provincial and municipal contractors?

In Belgium, the second pillar is currently, to the tune of more than 90%, a system that pays capital: at retirement age, the entire amount saved is paid to the recipient. ‘Yet,’ Prof. Devolder notes, ‘a pension plan is in essence a plan that gives you a pension, a regular income to replace the salary. That's how the first pillar works. But the second pillar has become a kind of savings account. Belgians are sceptical, they know that if they die before retirement age or soon after, they will have lost everything. Yet they should remember that, on the other hand, if they live for a very long time, their capital will have evaporated, they will have used it well before their death.’ Insurers are in the middle of this debate. Because opting for an annuity (the possibility still exists at the legal level) for them means bearing the risk of longevity. A long-term risk, difficult to predict. But on the other hand, there is no more loyal customer for an insurer than someone who has a life annuity, whose loyalty can be developed via other products. ‘And in tomorrow's world,’ Prof. Devolder concludes, ‘saving will be increasingly in the hands of pensioners, so shouldn’t we rather go back to annuities?’

Henri Dupuis

Pension system

In Belgium, the pension system has three pillars. The first is a life annuity (an amount received by the beneficiary each month until death) paid by the state (social security). All workers and employers have an obligation to participate in the system through the payment of contributions. The amount of the pension depends on various factors, including civil status, career length, and amount of income earned while working.

The second pillar is complementary. It is organised by companies (or some administrations) for the benefit of their staff only. It is free and both beneficiaries and employers participate.

The third pillar, unlike the first two, is an individual initiative rather than a collective one. Everyone, to the extent of one’s means and desires, can indeed subscribe under the pension savings scheme, a contract with an insurance company or a bank.

Actions de Recherche Concertées, or joint research projects

ARCs are an initiative of the Wallonia-Brussels Federation to promote interdisciplinary teams. They aim to develop university or interuniversity centres of excellence in basic research in fields considered priorities by university academics. After declaring an expression of interest, selected project candidates must submit a proposal explaining the project, its budget, outreach, etc., and defend it before the Research Committee and external readers. An ARC typically covers five years and provides significant funding for several researchers.

A glance at Pierre Devolder's bio

Pierre Devolder holds a master’s degree in mathematical sciences from ULB (1981). ‘I didn’t just choose these studies because I did well in high school but also for the aesthetic character of mathematics, which is both a science and an art. I liked its abstract and theoretical character much more than laboratory activities, for example. In addition, the mathematician is very free, he can invent universes, isn’t constrained by physical realities.’ But Prof. Devolder was also attracted by the applications that mathematics allows, thus he chose to pursue actuarial science. His PhD focused on stochastic models of capitalisation (ULB, 1986).

At the same time, he began (1983) a brilliant career as an actuary in the private sector, at the Royale Belge (now AXA), without neglecting academics (courses at ULB, Strasbourg). ‘In 2003,’ he recalls, ‘UCLouvain Prof. Jaumain contacted me. He wanted to strengthen actuarial studies at the university and offered me a chair. I took a month to decide!’ Teaching actuarial science and finance, Prof. Devolder is also a member of the Academic Pension Committee.

Published on November 19, 2019