Belgium: The challenge of small funds
Julie Henderson assesses Belgium's pensions landscape and finds that with a large number of small funds, economies of scale may be needed
Belgian pension funds were hit hard by last year's financial turbulence. By the end of 2008 the average pension fund had lost 25% in assets and earlier talk of regulatory reform and attracting cross-border funds has been replaced by funds' need to assess the sustainability of investment strategies.
There has been little change in regulatory activity since then, and rumblings of disquiet have surfaced concerning the regulator's lack of reaction to the crisis.
The 40% fall in global equity indices last year also forced some funds into underfunding, needing significant top-ups from employers. What saved many pension funds from serious losses, according to Belgian pensions experts, is the relatively simple asset allocation strategies adopted by schemes. Most funds do not have complex structures and the majority are not even exposed to high-yield bonds, according to Philip Neyt, director general of the Belgian Association of Pension Institutions (BVPI-BPFA).
Pension funds have now begun rebalancing their asset allocation and are slowly moving back towards the average 40% equities holding as the market appears to improve. But confidence has yet to show a significant shift back into equities.
The Belgian pension regime became self-regulating and largely qualitative in its rules in 2008 following the delayed implementation of the Law of 27 October 2006 on the Activities and Supervision of Institutions for Occupational Retirement Provision. However, in cases of underfunding, funds are still expected to demonstrate that they can recover the full funding in as short a period as 18 months - too short a time, according to pensions consultant Karel Stroobants.
Current rules require the funding ratio to be calculated in two ways: first, the short-term minimum reserve calculation has to be calculated at a 6% discount rate. But the current yield on Belgian 10-year bonds is around 3.75%, which means there is a need for strong investment returns after such a tough year, and if the value of the total assets is not enough to secure minimum funding, extra monies must be paid by the end of the year. A second long-term calculation then has to show that funding is consistent with predicted returns over three years.
To achieve that, says Stroobants, a fund would need at least the first year to see if that plan can be met, and this is why consultants believe the regulations need to be reviewed, for the benefit of all stakeholders.
There has been some progress in the second-pillar regime, introduced in 2004 under the so-called Vandenbrouke Law. There is now coverage of 60-70% of the population, and this is expected to rise to 80% within two years, in part because a further 220,000 new nurses and other workers now have access to a scheme in Flanders; work is to begin on organising a similar scheme for some 200,000 workers in Wallonia.
A national pensions conference, which was to have been organised by the government again this year, ought to offer a forum for genuine debate on second-pillar provision. But there is no sign of any activity on that project.
Slow, consistent progress is being made, however, on the take-up of cross-border pensions regime using the new OFP vehicle, a concept that Belgium hopes will attract multinational companies to the country.
Now that employers are more aware of the risk that pensions can have on their businesses, there is talk of pension funds consolidating and sharing platforms to improve costs and potential investment returns.
What is needed more immediately, suggests Stroobants, is a fresh perspective on smaller pension funds, and whether they can achieve economies of scale to make pension management affordable. Figures compiled by Stroobants suggest that of the 249 pension funds in Belgium, just 22 have more than €125m in assets under management, making cost management difficult under the new governance requirements.
Total contributions each year are estimated at around €1.2m, yet the average pension fund with assets of less than €225m has to meet regulatory return requirements and keep costs down with an average of just €25m in assets.
Stroobants estimates the minimum administration cost, excluding asset management, is at least €115,000 a year, to cover the need for an auditor, an actuary, compliance, accounting, a corporate secretary, administration, insurance, training, and legal advice.
Looking at a pension fund with average assets, this overall cost amounts to about 10% annually.
Stroobants says one way to improve these charges is to allow for greater transparency so the true value of pensions is reported independently and not within the overall financial results of the sponsoring company. Finance directors could then fairly assess what needs to be done to improve post-retirement benefits delivery both in times of crisis and in better conditions.