Something of a quiet revolution is taking place in the public pensions industry in the Flanders region of Belgium. Larger local authorities there with cash to spare from the hitherto dominant pay-as-you-go systems are opting to invest for the near and distant future, when demographic changes will create a financial strain on their balance sheets.
“There’s certainly money around at the moment. But the reserves won’t last forever and some public bodies are beginning to say that the money could be better spent by investing it to create funds for their benefits and pension provision,” says Luc Eelen, who is a consultant at William M Mercer in Brussels and who helped establish the recently formed Province of Antwerp pension fund, which, with Bfr3.5bn (e86.8m) under management, is only in its first year of activity, even though discussions surrounding its creation have been going on for the last 10.
“The pension fund is quite recent and we’ll probably need to wait a year before we really know how it’s coming along,” says Wilfried Boogmans, who works in the finance services department of the Province of Antwerp. He says that the province will continue to pay pensions directly until the new fund finds its feet. The fund is open to all public sector workers in the province of Antwerp with the notable exception of teachers, who have their own federal scheme.
He says that funding the scheme will not come just from investment returns. “The province and employees will continue to contribute directly to the fund.” At present the province gives 33% of its gross wage cost, whilst employees put in as much as 7.5%.
Mark Suykens, director of the Association of Flemish Cities and Municipalities (VVSG) in Brussels, says that there are two systems in place and that the framework for public sector pension plans has been around since the 1950s. “There is the global system, which is basically one fund for the national social security office and covers 90% of the local communities in Belgium and then there is the remaining 10%, which tend to be bigger cities like Brussels, Ghent and Antwerp and which have genuinely large amounts of reserves to invest.”
In Ghent, the public sector pension fund is now in its tenth year and, as in Antwerp, extends to more or less all public sector employees in the province of East Flanders except contracted staff. “East Flanders basically had the means to create a fund, the sole purpose of which was to ensure public sector workers’ pensions and retirement provision,” comments Frank De Neve, an adviser at the Province of East Flanders. The fund has over Bfr4.5bn under management, with 700 or so members in active service and 250 retirees receiving benefits from it.
“The local government here had the will to set in place a mechanism to secure future obligation for pension provision,” says De Neve when asked how the fund came about.
The Province of East Flanders originally contributed set amounts but budgets for the level of its contribution each year depending on wage costs, as in Antwerp. In 2001, it is expected to donate some Bfr70m.
Interestingly, the moves don’t extend to Wallonia, the French speaking half of Belgium. This is put down to both the state of the regional economies and differences in mentality. “Flanders is in a stronger position economically and people in the south may be more influenced by what goes on in France,” says De Neve.
Suykens believes that the Flemish are more in tune with the reality of changes in the working population. “People in the north are more aware of what’s needed in terms of pension provision and more open to change.”
Eelen, however, suggests that the French-speaking communities are beginning to wake up to the call to change. “There are a couple of seminars coming up and we see a growing number of representatives from French-speaking local authorities taking part, even if they are outnumbered by two to one.” Nonetheless, he concedes that French speaking Belgium is less concerned about pensions and that people in Flanders have more money to set aside anyway.
In terms of investment strategies, the public sector funds are far more likely to be subject to restriction than private pension plans. And the scope for change is also limited.
“There are many proposals concerning supplementary schemes for private funds but none at all for the public sector,” says Suykens. He says that pensionable salary continues to be based on just the last five years service in the public service whereas the private sector often takes an entire career into consideration.
“The public sector pension funds invest largely in bonds,” says Suykens. “They are severely restricted in their investment approach and are rarely allowed to invest liberally.”
This point is echoed by De Neve, who says that local government MPs had taken the decision not to allow the Ghent pension fund to indulge in too much risk. “There are very tight rules governing public pension funds investments. As such, we only invest in government bonds.” However this may change, as there are discussions about setting up a sister fund which would encompass greater risk by allowing investment in equities, though they would still need to avoid derivatives and emerging market stocks.
Given the current market, De Neve doesn’t think it necessary to change at the moment anyway. “The fund is in a very healthy state and as such there’s no real need to adopt a strategy that requires greater risk.”
The Antwerp fund, however, has a completely different investment approach and is much less restricted. “We have decided on a strategy of 60% bonds and 30–40% equities. The bonds could be government and corporate; domestic and international,” says Boogmans. He points out that the bonds tend to be government bonds and although they weren’t really restricted in their investment policies, they had decided to play safe and remain defensive since the fund had only just been launched.
The Antwerp fund is split into two portfolios of equal importance. “There is no specialisation in either fund. It’s not a matter of one dealing in bonds and the other equities, but more that the overall size of the fund meant that it would be more manageable this way.”
Eelen at Mercers identifies other areas where public schemes are restricted. “Public organisations are ‘expected’ to invest in ethical and social funds, but it isn’t always easy to ascertain asset managers’ positions or commitment to these.” He says that public pension funds have a moral, but not necessarily a legal, obligation to invest as much as 10% in this respect. Legally bound or not, regional government nonetheless expects the public funds to justify their investment strategies.
Eelen says that this is often confounded by managers lack of knowledge, comprehension or even honesty in this area. “Managers will often claim to have assets in ethical and social funds or to understand the concept and thus be willing to adapt their strategies, but in reality this doesn’t always happen.” Many managers are reluctant to include these kinds of funds , since no benchmarks, indices or other performance measurement devices to track them exist yet.
“The Green party is involved in government now and the unions also push for social and ethical investment strategies,” Eelen points out.
Overall, however, there has been no conflict with the unions over the development of the funds. Indeed the local authorities have encouraged unions to join them in discussion.
“We consulted and informed the unions of everything we were doing. And they also took part in discussions,” says Boogmans at Antwerp. He points out that pensions are high on the unions’ agenda and that they agreed more than just in principle that something needed to be done.
De Neve in Ghent says that unions were initially concerned about the fund’s creation, since the legal structure didn’t already exist but the situation had now completely changed. “There was some initial conflict with the unions, but they ended up helping us with the structure of the fund.”
He says that the unions continue to sit in on committee meetings and offer advice, even if they don’t actually play a part in any final decision-making. There is no in-house management of assets among the new public funds and the attitudes towards consultants differ.
“We do not use consultants,” says De Neve, pointing out that the selected managers are free to take decisions so long as they respect certain features, such as the bond/ equity ratio for the new portfolios. The assets they invest in are not restricted to Belgium. “Our investment strategies incorporate an international structure. And we are actively looking around Europe for managers to take care of the new portfolios.”
But in Antwerp, Mercers was used to help structure and establish the fund. “We will continue to use consultants, since all our asset management is outsourced, and we believe their advice is invaluable in what we are trying to achieve,” says Boogmans, who also says that there are no restrictions in the choice of manager from a location point of view.
Suykens believes that reforms should be introduced to allow a greater mixture of public and private funds. “We need a better system than we have now. We need to reform the public sector to start allowing greater capitalisation of its assets. And we need a basic pension financed by a central fund, supplemented by investments in the private pensions sector.”
De Neve doesn’t think that such radical measures need to be taken for the foreseeable future, so far as the east Flanders fund is concerned. “We are almost at 100% assurance of our pensions obligations. The main question for the future for us is how to consolidate that position. The fund is in a very healthy state, so we don’t have to open it up too drastically.”

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