Belgium's pension funds invest more than a third of their average assets abroad.

This puts them second to Ireland's in terms of international diversification. With domestic financial markets as small as they are in Belgium, there's just no choice.

The performance of the Belgian stock market has been good, but it is still a small market," says Hervé Noel, president of the Belgian Association of Pension Funds (ABFP). "It is a big risk to concentrate all your investment in that market," he adds.

Private pensions assets in Belgium total around Bfr800bn ($21.4bn). About Bfr220bn of this is held in private pension funds.

The pension fund industry began life in the 1970s when laws on establishing self-administered and segregated pensions were first put in place. Since 1985 new private pension schemes have been required to be prefunded with minimum funding rules, but before this many schemes were a mixture of book reserve and pay-as-you-go.

In 1996, total foreign investment accounted for 37.3% of average assets, while domestic investment stood at 59.5%, according to figures from the ABFP. This division is roughly the same as it was 10 years ago, although there have been fluctuations.

Currency hedging is not often applied to pension funds in Belgium, says Koen de Ryck, managing director of Pragma Consulting. Most foreign investment is held in other EU currencies anyway.

European economic and monetary union, assuming it happens, will not have a great impact on pension funds, de Ryck says. "We are moving very closely as far as currencies are concerned, so the currency impact will not be that great," he says.

But paradoxically, the dawning of the euro could herald more investment outside the EU, de Ryck argues. Within a single currency framework, correlations between the European member state markets will increase, so there will be more reason than ever to diversify outside the EU, he says.

Belgian pension funds have always had a comparatively high equities content. In Europe only the UK and Ireland have higher average stocks weightings. Last year, Belgian funds held 41.3% of assets as shares, up from 39.5% the year before. Foreign shares were 23.5% of assets, up from 22.6% in 1995, while domestic shares were 17.8%, after 16.9% the year before.

De Ryck says the equities content of pension funds in Belgium is gradually increasing, at about 2% a year, albeit from a relatively high level. "But much of the rise is due to market appreciation rather than to any deliberate decision," he says.

"Pension funds have moved slightly but very consistently to equities," says Noel. "That is a move that is going to be pursued because funds are using more sophisticated methods to define the level of risk they can allow themselves, in view of the profile of their liabilities," such as formal asset liability studies or other methods using similar techniques, he says.

Paul de Smet of consultants Conac says it is only larger pension funds which would have asset liability studies carried out. But where these studies are done, this would probably lead to higher proportions of assets being invested in shares.

"I know funds of Bfr400m which say we really should have some kind of asset liability study done... but mostly it is only funds which have one or two billion," he says.

However, fund managers are un-likely to make any great shift towards equities - certainly they are not going to find themselves anywhere near the level of pension funds in the UK. Assets such as equities and property are traditionally good investments in a relatively high inflation environment, and this is why they have been historically popular in the UK, says Noel. But now, and particularly in Belgium, when the inflation outlook is stable, the incentive for such heavy equities weightings is not there, he says.

Some say that, far from making long-term strategic decisions about how heavily weighted their fund should be in shares over the next few years, Belgian pension fund managers are busy following expected stock market developments.

The past 12 months has yielded good returns for equities, both abroad and in Belgium. But more recently there has been a slight correction on some markets. "Funds are reluctant to put too much money into stocks at the moment," says de Smet.

Often it is the pension funds of multinationals in Belgium where investment patterns lean more towards shares. "A lot depends if it is a pure Belgian company or if it is a company sponsored by a British or American company, where they might be more likely to invest in shares," he says.

An increase in outsourcing of asset management, which often leads to mandates for foreign service pro-viders, could herald a bigger step in the equities direction. "Foreign in-vestors are having a greater and greater portion of funds to manage," de Smet says.

In Belgium, pension funds have benefited from relative freedom from investment restrictions. Existing restrictions, which date from 1985, include a general requirement to invest prudently and forbid certain non-liquid investments such as works of art. Other limits are basically diversification requirements. From January this year, a requirement to hold at least 15% of assets in state bonds was lifted. At the same time a 10% limit on the amount of assets which can be held in each foreign currency was brought in. Funds can deviate from these requirements as long as they get approval from the insurance supervisory authorities, which also regulate pension funds.

New legislation is due to come into force at the beginning of next year. Noel says that, judging by the current shape of the draft legislation, there will be very few restrictions on investing abroad.

"In all developed markets, there will be no problem," he says. "The only one thing which could be annoying... is there is going to be a limit of 10% on securities issued by one group of_companies." This, he adds, could be a problem because of the difficulty in defining a group. Pension funds are already barred from holding more than 5% of assets in the securities of one company. The new legislation will be finalised next month."

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