Market volatility has not precipitated any sharp changes of direction among Belgian pension funds, according to Hervé Noël the head of portfolio management at Tractebel Pension Funds in Brussels. Furthermore, the regulator, the Office de Controle des Assurances/Controledienst voor Verzekeringen (OCA/CDV) is using a light hand on the tiller.
“Until now the crisis has not led to any change in our strategic asset allocation,” Noël says. “Most of our defined benefit pension fund colleagues in Belgium follow the same approach. What does differ from fund to fund is the way they intend to re-balance from bonds to equities. Some are doing it gradually; others are waiting for more stability on the markets.”
Noël does not plan to move into ‘safer’ asset classes. “In my opinion, it is much too late and too expensive to fly to quality, shifting from equities to government and other high quality bonds. From a strategic point of view, pension funds need to take risks in order to achieve a decent long-term return on their assets. Otherwise we have to rely on the returns from bonds, which would mean a dramatic rise in the cost of pensions.
“The problem is more the diversification of the risk. Obviously, in times of crisis the geographical dispersion of equity investments is not sufficient.”
He suggests pension funds should be looking towards corporate bonds including the riskier sub-investment grade bonds. “These provide the same equity risk as equities but without the volatility of equity market.” Private equity is also a possibility. “It’s probably a good moment to jump in,” he says.
Pension funds should also implement some long/short strategies. “Without using the words hedge fund, there should be some potential to short the market. Instead of 100% long managers we could have maybe 60% to 70% long, meaning 30% to 40% short. Pension funds can afford some illiquidity provided they get a premium for it.”
There would be no objection from the regulators to such diversification, he believes. “Generally, regulation is very liberal in Belgium. I suspect that if a fund were to invest 100% in equities the authorities might intervene, but there is no specific investment limit, although we may not invest in commodities.”
So far, there has been no particular pressure from the regulator, he says, and he points out that the authorities have commented recently that the pension funds in general do not have a solvency problem. “We have no experience of widespread solvency problems, so it is not easy to predict what the reaction of the control authorities would be in that case.”
In the mean time, the OCA/CDV has carried out a survey of pension funds on the basis of the situation at 31 August (as it did it with the insurance companies as at 31 July).
Regulations on funding and solvency say that if the assets of the pension funds at market value fall below ABO (the value of a pension taking into account past service and present salary) – plus a solvency margin (if the pension fund covers death/disability benefis) the fund must discuss a recovery plan with the control authorities.
“This is a rather short-term based approach in a long term minded industry,” Noël comments. “Could regulation become more flexible, treating a pension fund as a going concern? Certainly, I think there is openness within the regulatory authorities.”
Currently the law leaves it up to the regulator and the pension funds to decide on how to implement a recovery plan. The law does not specify measures such as reduced benefits or increased contributions. Nor does it impose any time limit for recovery.
“A feature of regulation in Belgium is that there is a lot of interpretation and flexibility,” Noël points out. “It is also a feature of the European pensions directive, which leaves a lot of freedom to countries to regulate pension funds in their own way.”
This flexibility could in the future become a mixed blessing, he suggests. Currently, the regulator’s flexibility represents a welcome pragmatism and a willingness to allow pension funds to work out their own salvation. However, regulation could be tightened if markets deriorated. “The authorities could decide to apply the law in a far more stringent way if market conditions worsened.”

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