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IPE special report May 2018

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Consultant calls for longer Belgian recovery time

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  • Consultant calls for longer Belgian recovery time

BELGIUM - A Belgian pensions consultant has warned local pension plans need more time to meet funding recovery plans, as the industry-standard short time frames are placing undue pressure on executives and company sponsors to meet full funding targets.

Karel Stroobants, an independent director who acts as an adviser to several Belgian pension funds, believes a rethink of the existing regulatory regime is needed - at least in terms of the time frames pension funds have to follow to meet funding levels - especially where pension funds believe they must meet guaranteed returns.

"Looking in-depth at the pension plans in Belgium and Britain, the UK's recovery periods are much longer and there is a pension protection fund. The decisions are also based on a covenant with the company, so the stronger the covenant, the longer the recovery period. These two elements would be useful [in Belgium] because we do not have an insurance programme and we do not look at the covenant except once a year. Yet schemes have to be fully-funded in a short time," said Stroobants.

The Belgian regulatory ruling currently requires the funding ratio be calculated in two ways: first, the short-term minimum reserve calculation has to be calculated at a 6% discount rate. The return on government bonds is 3.75%, leaving the risk-free rate needing strong investment returns after such a tough year. So if the value of the total assets is not enough to cover that sum, extra funding must be paid by the end of the year.

A second long-term calculation then has to show the funding is consistent with asset allocation predicted returns over three years.

In order to achieve that, said Stroobants, the fund needs at least the first year to see if that plan can be met, yet in many cases the pension funds are being treated as though they have to be fully funded very quickly after that.

The UK's Pensions Regulator recently relaxed its rules to assist pensions recovering during the financial crisis - allowing defined benefit schemes to take longer than the usual 10 years to reach full funding providing other protections are in place - but Belgian pension plans are still required to complete their recovery at a much faster pace.

So whereas a UK pension plan may have 18 years to reach full funding, Belgian pension plans have the equivalent of just 18 months. And this is why regulations and industry practices need to be reviewed, for the benefit of all stakeholders, according to Stroobants.

"A recovery plan should take into account the cash flow situation of the pension fund. A scheme which needs to pay out benefits is completely different to a scheme which for the next 10 years is cash flow positive," said Stroobants.

"And it should take into account the strength of the plan sponsors. If the sponsor can go broke, that is a different situation. But if the duration before cash flow is needed is long and the governance is okay, I don't see a problem with recovery plans being 5-7 years. If one of these elements and the cash flow is negative, you should have a shorter recovery plan of three years. The strength of the company and the hard promises of the company - if they are in writing - are important. Five years would be reasonable, unless you have cash negative pension funds and companies with a very bad reputation," he argued.

Part of the additional complexity to the Belgian pensions regime is defined contribution schemes are expected to effectively operate under the same rules as DB arrangements. But that can create difficulties too, according to Stroobants.

"The rules we have are made rather for a defined benefit plan, and not for a sector-wide plan, with a long-term insurance rate. So a very complex legal discussion has to be had about whether the plan should be treated as insurance with an annualised guarantee, or as a pensions contracts with an average guarantee," he said.

"If you have a -2% return in year one, and the long-term guarantee is 3.25%, the legal department would argue you have to put extra money into the scheme in the first year. That is difficult because with labour negotiations that is not going to happen," said Stroobants.

"We need legal departments to clarify what the rules should be. They need to stop being influenced by the insurance market and saying it should be annualised because they need to be realistic."

A review of Belgian pension regulatory needs will be published by IPE next month as part of its annual Top 1000 European Pension Funds supplement.

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