Belgium's pensions regulator, the Banking Commission, is to announce the funding details for the organisation for financing pensions (OFP), the recently-unveiled legal entity designed to host pension funds, on 6 December.

The OFP has a light regulatory touch and tax advantages and is intended to spearhead Belgium's push to become a pension domicile under the EU's pensions directive.

When announced last year it prompted speculation that smaller Dutch pension funds, burdened by requirements of the new FTK assessment framework, would be among those attracted by the OFP to defect across the Belgian border.

But the Netherlands authorities were scathing in their riposte. Dirk Witteveen, director of the Dutch regulator DNB, dismissed the OFP as trying to "sell a car without yet having the technical specifications".

"That was logical," says Karel Stroobants, a veteran of the Belgian pensions scene and now an independent director. "When they asked the question: ‘how are you going to follow up and look after the solvency of pension funds?' we did not have an answer.

"What the Banking Commission will do now is to fill in the missing link; we have the social law, the control law and now the funding," he adds. "And the concept is that the decision about whether a pension fund is following the European rules and is fully funded will be decided on the basis of fund-specific calculations."

Stroobants says that pension funds will decide their individual financing and funding rules on the basis of their own ALM, and calculate the necessary buffer - "we call it social capital" - to cover the risks.

"The board of the pension fund will then go to the Banking Commission, present the model saying it is using a discount rate of ‘Y' because it expects a return of ‘X' because it has such-and-such kind of an asset mix, and it has long duration/short duration, positive or negative cash flows, a strong company sponsor or no sponsoring company, concluding, for example, that it needs a funding level of 110%," says
Stroobants.

"The important factor is that all the parameters proposed are used in a consistent way in all the different calculations presented and it needs to be well documented.

"All these elements will be taken into account and the Banking Commission will be able to accept or reject the proposal. Then you have a plan to build up those buffers in the long run. And unlike in Holland, where you need a large quantitative formula to calculate your buffer and very specific definitions of the time periods in which you have to recover from any underfunding, in Belgium all this will be fund specific.

"There's not one number in the law, not one. The follow-up will be done on the basis of a ‘continuity analysis' that focuses on the short and long term.

"The Dutch regulator created one method that's the same for everybody and leaves almost no room for fund-specific parameters. But while our system is a very consistent, nothing is quantified so it's incredibly dynamic. When it is published the Banking Commission will be able to say: ‘Look, we have adopted the same concept as you but we put the full responsibility on the board of trustees'."

Stroobants concedes that as a result the new system may raise other challenges. "As pension funds will have to come up with models it will create major challenges for the board of trustees of the many smaller funds that perhaps will not have the in-house facilities for all of this. And if outsourced where are the consultants able to do this?

"If you go to a Dutch consultant, the first thing they ask, for the continuity reports funds have to make, is what about the benchmarks, whether you need 5% overfunding or 20%. But that just becomes the question to resolve. So even for Dutch ALM specialists it's very difficult to come into our situation and say ‘we're going to help you calculate your own benchmarks'."

But will the new regime attract pension funds to relocate across the Belgian border?

"I'm a little sceptical about whether we will see a big move by foreign pension funds into the Belgian market," says Stroobants.

"Even with our attractive legislation there are a lot of political and social negotiations to complete before a move. I do see some initiatives coming from multinationals with expatriates who want to create a new kind of a sub-fund just to test the market.

"But the biggest problem we have is political consistency, whether this law will stay for the long term, and here we don't have the best track record. So it is a long-term game and the political crisis in Belgium at this moment is certainly not the best publicity.

"But this is an unbelievably modern law. I heard somebody from the Banking Commission say: ‘With this law we are already anticipating the Solvency II revised international capital framework'."

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