Philip Neyt talks to Fennell Betson
It is easy to lose sight of the enormous project the launch of the Belgacom Pension Fund was - the creation of Belgium's largest pension fund by far, for the 33,000 employees and retirees of the national telecoms group, majority owned by the state. Though the project was initiated several years ago, it was not until 1995 that the fund was legally established, with assets transferred from Belgacom amounting at end of the year to Bfr46bn ($1.2bn). But the build up of assets in the fund by transfers from Belgacom each year, has increased the sums significantly. Belgacom Pension Fund managing director Philip Neyt says: With the new contribution this year our assets will be around Bfr95bn." But with ultimate liabilities with a present value of Bfr150bn, the build-up of contributions has still some way to go. Also, pension payments have to be made regularly to the 9,000 plus retirees.
A key feature of the fund, and one that Neyt emphasises again and again, is that it is a first pillar scheme, albeit funded and externally managed. "Firstly, the scheme was a move from the pay-as-you-go system in force, but it was to provide a first pillar pension, a social security pension for Belgacom employees."
What Belgacom has done, others will be watching closely. "We are the prototype for public sector schemes. Many people are looking to us to see what they might do," says Neyt.
Initially, the investment approach was cautious, with an overall limit on equities of 30%, which Neyt considers was pretty good in the circumstances of the time. "On average, Belgian pension funds in the private sector had equity exposure of around 30 to 40%." The limit was arrived at through an asset liability study undertaken at the time, and the decision was taken to go to the 30% maximum equity limit for the strategic benchmark, with 15% in domestic and 15% in OECD equities. "Since equities have done better than bonds this has worked in our favour," he adds.
The fund took the unusual step of appointing eight managers (Barclays, Gartmore and Goldman Sachs in London, Fortis and Generale Bank in Brussels, Indosuez and State Street in Paris, and Lombard Od-ier in Amsterdam), each was given an identical sum of Bfr7.3bn to manage with much the same mandate, including defined tactical margins around the strategic allocation.
"The idea of having a number of managers was to obtain a degree of diversification and uncorrelated approaches, so that they are not all moving in the same direction. While they are all balanced mandates, you can see a lot of differences in style, some are more top down, some bottom-up and others are more value. So we combine many styles. It would be easy to say they are the same, they decidedly are not."
The mandates have only run 20 months so far, points out Neyt, which makes it too short to pass any definitive views on the managers' skills. "What we are looking for at this stage is that the performance is consistent with the style and philosophy and the discipline of the investment management process. We do not like inconsistencies! They have to do what they promised- and we definately do not like surprises!" The fund is monitoring closely as to where managers' performance is coming from - is it due to good or bad luck or to their skills?
The selection of these managers was done through the EU's public tendering procedures. Neyt describes this as "complex and structured" but maintains that if the fund did not have to use this procedure, it would use something similar. "The important thing is to have everything in place beforehand. Once you start the process, everything has to be ready." As everyone is on the same basis, it is an objective procedure.One of the main advantages, is that it keeps the asset managers at bay, until those asked for presentations come to the group's stylish headquarters in Brussels.
Last year the pension fund used the procedure for a passive balanced mandate, on 70/30 bonds/ equity basis, for Bfr8.6bn, which was won by State Street in Paris. The aim here was to ensure that there would be little drift from the strategic targets, says Neyt.The current mandate being sought is for a specialist equity brief. The decision to go this route was only taken after a very detailed asset liability study. "Our intention was to do this in as open a way as possible. We set up a task force last year with the representatives from the company, the shareholders and the unions." The liabilities in the final analysis are not those of the pension fund, but of Belgacom, since they ultimate responsibility for these. They have to integrate these risks into the company risk." Neyt is a firm believer in such studies for funds, and not just because they involve a wide range of those with an interest in the pension arrangements, but without the study being used as a substitute for decision making. "The first discussions we had were about the assumptions and more pension funds should be aware of the need to put effort into the inputs, as all the outputs depend on these." The resulting models in the hands of the actuaries can be "fantastic and very complex", he says.
"We spent considerable time on the communication aspects, trying to make it as simple as possible. If people do not understand it they will not believe in it." His view is that the boards need a realistic set of assumptions, which are not "too aggressive". These inevitably will have to be subject to some sensitivity analysis, to check if real returns are lower or higher, what the impact would be on the expected rate of return of the fund. The study confirmed that an all bonds strategy would make it difficult to achieve fully funded status, but increasing the equity content meant increasing volatility and impacting on the company's contribution rate for the scheme's defined benefit (DB) regime. The current minimum funding requirement did not impose a constraint, says Neyt. After much discussion and a thorough examination of different efficient frontiers and a range of risk tolerances, the decision was to go to a "breakeven mix of 45% in equities and 55% in bonds". "Our aim is not to have the highest absolute level of return, or the lowest risk profile. It is a question of having a good risk return profile towards your liabilities."
On the basis of the allocation decision, the bench- mark is constructed and the asset managers' tracking error is built-in as clearly the fund does not want them to drift too far from their strategic benchmark. "Otherwise what is our study worth?" But, Neyt adds: "They have to see where they use that tracking error, by securities selection, by country or sector selection, by timing, by reading the currency movements, to see where they can add value." The new mandate is more specialised and is designed to help in bringing the equities component closer to 45%. "This is why we are looking for a global equities mandate to add to the balanced mandates."
The decision should be made by the end of June, as a result of the recently-announced public competition. But Neyt expects to carry-out a new ALS in two to three years' time, because of the restructuring ahead for Belgacom where some 6,000 employees between the ages of 50 and 60 will leave the company. "It is essential to know that our asset mix still meets our liabilities."
Earlier this year, Belgacom introduced a new complementary scheme. Neyt is very pleased that the decision was taken to go the DB route with this arrangement. "We know DB schemes have disadvantages, but you can build in measures to avoid many of these problems." It is designed for newly recruited contractual staff, who are also members of the state social security pension scheme. But the scheme can also be used in certain circumstances to top up or provide certain benefits for the statutory staff, particularly where part of their earnings may be outside the state pensionable definitions, as a result of the Hay Management reward system operating. The new plan is designed to provide equivalent benefits to both statutory and contractual staff doing the same work. However, the state social security scheme produces a lower pension than the civil service scheme level of benefits that the statutory Belgacom staff obtain. So how the new plan fits with the state scheme for contractual staff and the main Belgacom scheme for statutory staff will be different."
Currently it has around Bfr250m invested, which is externally managed, with over 50% in equities as the membership is much younger. "It will become an important pension fund in the Belgian market," predicts Neyt, who already has in his charge the country's most important fund."