Belgium: GDF Suez/Belgian gas and electricity pension funds re-assess euro government bond exposure
• Invested assets: €1.5bn (December 2010)
• Three DB and two DC funds
These five pension funds - comprising a total of 20,000 members - cover GDF Suez Belgium, the Belgian entity of GDF Suez, a global independent power generating company, and other companies from the Belgian gas and electricity sector.
The original DB schemes typically had a 75% career average replacement rate. They closed to new entrants between 1999 and 2002 and have been replaced by DC schemes.
As they have been paying out lump sums upon retirement for many years, the schemes have few pensioners. Membership is compulsory. Contributions, which are defined by the individual plan, are split with 80% from the employer and 20% from the employee. Members that leave their employment are can leave their accumulated capital with the scheme or transfer it to the pension fund or insurance contract of the new employer.
Until recently, the pension funds had transferred the reserves of deferred members to an insurance contract. But this changed when the Vandenbroucke law was introduced in 2004 stating that deferred members could leave their reserves with the pension fund.
As a multi-employer pension fund, each employer has its own compartment. This means there is no solidarity between different employers. But the five funds have a joint investment committee and use the same pooling vehicle for economies of scale.
The vehicle used by the pension funds is a Luxembourg SICAV with three sub-funds, which are split into high-risk, medium-risk and low-risk categories. The high-risk compartment contains all equity investments, such as listed equity, listed real estate and private equity.
The medium-risk portfolio comprises high-yield corporate bonds, emerging market debt, convertible bonds, infrastructure, private real estate and funds of hedge funds.
The low-risk category holds investment grade bonds and is made up of 70% euro corporate ex financials, 20% euro sovereign and 10% euro inflation-linked bonds, although this currently stands at zero due to low real interest rates.
Most traditional asset classes such as US and European equity are invested passively, while more specialist investments such as convertible bonds, high yield corporate bonds and funds of hedge funds are undertaken by active managers.
At present, the traditional asset allocation is 30% high, 20% medium and 50% low-risk strategy. The expected annual return of this strategy is 5.4%.
The first asset allocation of the SICAV in 2003 consisted of 43% high, 22.5% medium and 34.5% low-risk strategies. However, after the 2009 financial crisis, employers wanted to reduce their pension funds' risk profile, upon which the scheme moved to the current allocation.
"Our allocation to risky assets had already fallen well below 43% on the back of the financial crisis, meaning we did not have to sell a lot of them," says Olivier Poswick, in charge of asset management at the pension funds.
Within the different categories the main change occurred in the low-risk portfolio. In 2006 the pension fund stopped investments in corporate bonds because, at the time, the credit spread was too small to justify the risk.
"However, when we saw the level of credit spread reaching 100 to 150bps in 2008 we decided to return to the European corporate bonds market excluding the financial sector," says Poswick. "We believe it is very difficult to understand the rating of financial institutions by agencies. The asset allocation of 60% euro corporate and 40% euro government bonds changed again in 2009 when we increased our corporates exposure to 70%.
"Currently we are working on the euro government portfolio. Half of the portfolio is allocated to high quality bonds such as German, Dutch and French ones but the other half is invested through an index fund. We are reconsidering whether a passive approach really is the best solution as we are technically exposed to the most indebted countries. A decision on this is expected soon."
Within listed equity, the main change has been an increase in the allocation to emerging markets, which in 2010 rose from 10% to 25% of the equity portfolio. For illiquidity reasons, the pension funds decided to stop new commitments to private equity and infrastructure because, as durations are shortening, the DB schemes pay out an increasing amount of lump sums. This is also why the pension funds are likely to lower their level of risk in the coming years.
GDF Suez Belgium and other companies from the Belgium gas and electricity sector pension funds generated an average return of 8% in 2010, slightly lower than the average Belgian pension fund due to their currency hedging strategy and the strong dollar.