• Invested assets: €940m and €150m (Dec 2010)
• Separate DB and DC schemes

The pension fund of Belgian bank and insurance group KBC has returned to pre-crisis levels following 2010 returns of 9.42% for the DB and 6.52% for the DC scheme, leaving the scheme with a short-term, liquidation scenario funding level of 147% and a long-term funding level of 113%, up 8% and 4% respectively on 2009.

The 17,000 member-strong pension fund is in the middle of its strategic asset allocation review. The first stage which involved looking at the basic framework and risk components, has been completed. The second phase, expected to be concluded by April, reviews the risk management and the implementation of different asset classes.

"We will analyse how the different asset classes fit into the framework," says Edwin Meysmans, managing director of Pensioenfonds KBC. "At this stage, it looks like we will de-risk and therefore slightly reduce our strategic allocation to equities, which today stands at 50%. It is still unclear, whether we will reduce that exposure by, for example, 5% or 10%. The resulting capital will not all be allocated to fixed income - instead, it is likely to be divided between fixed income, real estate and asset classes we have yet to invest in, such as, commodities."

At the end of 2010, the largely passively invested DB scheme comprised 45% fixed income, 43% equities, 10% real estate and 3% cash. While real estate and cash were unchanged from the previous year, equities were slightly up to over 2% at the expense of fixed income.

The most significant shift occurred within the equity portfolio. At the end of 2009, more than half of its exposure was to stocks within the European Economic and Monetary Union (EMU), with the other half comprising of US, UK and Japanese equities. By the end of 2010, EMU equities had fallen to 45%, while the US share amounted to 30% and UK and Japanese stocks remained unchanged. Allocation to emerging markets equities - with a focus on Asia - rose from 8% in the previous year to almost 14% in 2010.

"Based on predictions relating to demographics and growth, there is a long-term as well as a short-term case for increasing the allocation to emerging markets," he says. "Emerging markets make up around 14% of market capitalisation and we would like to take this as the bottom line."

Because of its LDI strategy, the bulk of KBC Pensioenfonds' fixed income portfolio consists of interest rate swaps. In addition, it invests a small portion in government and corporate bonds.

As the pension fund has no sovereign bond exposure to Greece and Ireland and only a limited holding in Spain and Portugal, the main risk concern surrounds the benchmark-based, 30% government bond exposure to Italy. The fund has to report regularly its sovereign bond exposure to the Belgian financial regulator because part of the pension fund is incorporated into the global government bond exposure of its sponsor.

"One of the issues we have already been preparing for together with the sponsor is the expected changes to the international accounting rules such as the abolition of the corridor by 2013, which would result in increased volatility," says Meysmans. "We have already done the exercise and the reporting under these new rules even though they are not in force yet."

As the sponsor received some government aid during the financial crisis, the European Commission is now forcing KBC to sell off certain assets. One divestment, the sale of reinsurance company Secura, took place in 2010. "As all these companies belong to the pension fund, we are involved in their sale," he says. "While this means we lose liabilities we also lose assets at the same time. Two more divestments are planned for this year."