The appetite of the Belgian dentist, Belgium’s archetypal retail investor, for capital guaranteed and minimum return products is legendary. To satisfy this investor, investment products must provide protection from downside risk.
Now the country’s institutional investors are developing the same sort of appetite. Part of the reason for this is the impact of the Vandenbroucke Law (known familiarly as WAP) which became effective at the beginning of this year. WAP is intended to expand the coverage of second pillar occupational pension schemes from 33% to 66% of private sector employees by encouraging the creation of industrywide ‘sector’ schemes.
It also introduces a requirement to provide a minimum return to members of defined contribution (DC) schemes. This is a new challenge to asset managers, whose business is reward for risk rather than guaranteed returns, and it could lead to a loss of new business to the insurers.
This is a particularly unwelcome development at a time when asset managers have seen a third of the value of the Belgian pension market disappear with the Belgian government’s decision to acquire the E4bn assets of the Belgacom pension fund. The market was already small before – at E12bn, worth about a third of Ireland’s pension fund market – and has now become much smaller.
Another reason for the new interest in protecting the downside is the impact of international accounting rules on Belgium’s corporate pension plans. From 1 January next year, listed companies in Belgium will be required to maintain their accounts in accordance with IFRS standards. IFRS 19 (formerly IAS 19) requires pension funds to be included in a company’s balance sheet. This means that the volatility of returns and the way pension schemes are financed will have a direct impact on a company’s bottom line.
On the surface, little appears to have changed in Belgium’s institutional investment. After three years of a horrendous equity bear market, followed by a partial recovery in equities, asset allocation in Belgian pension funds has remained relatively stable. While other European countries, notably Germany and Denmark, have seen investors flee from equities, Belgian institutional investors have kept their nerve.
Hugo Lasat, chief executive officer of Dexia Asset Management in Brussels, says: “In general the market is not moving away from the classical portfolio management type with high correlation of the underlying markets. People are not changing significantly the structure of their portfolios.”
Figures from the Belgian Association of Pension Funds support this. Average allocations are 48% to equities 39% to fixed income, 6% to real estate and the remainder to cash. Equity allocation has fallen from the typical pre-bear market level of between 50% and 55%. But this fall is less than the fall in the market, and suggests that some pension funds have re-balanced their portfolios in favour of equities. “On average pension funds have bought equities in the downward trends. They didn’t sell, they bought,” says Lasat.
One reason for this may have been the attitude of the regulator, the Office de Controle Des Assurances (OCA) during the equities market crisis. In contrast to the PVK in the Netherlands, which has insisted that some pension funds re-allocate their assets, the OCA left pension funds largely alone. Francis Heymans, director sales and marketing, institutional asset management at Petercam says: “Our controlling institution didn’t really intervene in that way. It took a long term view. So pension funds didn’t re-allocate immediately their assets because there was no pressure on them to do so.”
Heymans says funds have learned a lesson from the equities crisis. “In the coming years pension funds will be much more aware of risk control and they will have to be able to monitor risk better. This will be true for the bond side as well as for equities .”
Diversifying risk is likely to become important, says Jandaan Felderhoff, director, institutional sales and client relations at T Rowe Price in the Netherlands and Belgium. “What is happening in Belgium is what happened in the Netherlands, where most pension funds were basically left with two asset classes – large cap European equity and European government bonds – and found their risk was not very well diversified. Since then there has been a huge move to use more asset classes and more types of assets.”
Felderhoff suggests that a portion of the equity risk will be transferred to alternative investments: “Some of the larger pension funds are introducing low correlating or non-correlating assets, such as convertibles and property, and to a lesser extent fund of hedge funds and private equity.”
An active interest in alternative investments and absolute returns is still limited to the largest pension funds such as the E1.75bn Tractebel fund, which has around 5% of its portfolio invested in alternatives. Smaller funds still stick to the benchmark, and asset managers are now trying to sell them the idea of a diversified balanced portfolio.
Fortis Investments, for example, has developed the concept of ‘smart benchmarking’, the diversification of a traditional balanced portfolio of large cap equities and government fixed income. Olivier Lafont, head of relationship management, institutional, at Fortis Investments Belgium, explains: “What we have done in the portfolio since early last year is diversify with a lot of satellite asset classes – convertible bonds, emerging markets, small caps, high yield bonds and real estate – with good correlation features allowing us to decrease the volatility of the portfolio while maintaining the return.
“This worked well last year because all the satellite classes performed well. So by having all those asset classes we had a better return in our balanced products than with our former strategy.”
There is also evidence of increasing diversification within fixed income, as investors move into European corporate bonds, high yield and emerging market debt. Pol Pierret, country manager of AXA Investment Management Benelux, says there is a clear need for pension funds to increase their exposure to corporate bonds. “It’s a question of the risk/reward profile of this type of asset. Corporate bonds provide a return between govvies and equities, a limited risk if we focus on a A-rating on average, and a volatility much lower that of equities.”
Pierret suggests the current low interest rate environment in Belgium is encouraging investors to take a core-satellite approach to fixed income investment, with a more passive management in government bonds and more active management in corporate bonds, including high yield and emerging debt.
In the longer term, the prospect of a future rise in interest rates could encourage pension funds to look at shorter-dated cash products, says Yves Van Langenhove, head of institutional business, western Europe, at Invesco in Brussels. “What will become an interesting asset class for pension funds are more short duration or enhanced cash products which limit the duration risk you take on your fixed income portfolio.Because if you look at the perspective of the next few years sooner or later interest rates will start to rise.”
What has really concentrated minds, however, has been the introduction of the WAP. Asset managers have generally welcomed the new law as an effort to expand occupational pension provision. Pierret of AXA IM says: “it shows for the first time for a long time the government has the will to create a framework that will encourage the development of a second pillar.”
Dexia’s Lasat agrees: “It is clearly a very good social decision and a very good financial decision. It supports the development of pension funds in Belgium and also the number of the contributors to those pension schemes.”
Specifically it will encourage the promotion of sector pension plans. Sector plans already existed before WAP, and now total 12 However, WAP has created a specific legislative framework for these plans. This has already encouraged FEDIS, the professional organisation for wholesalers and retailers in Belgium, to set up a sector pension fund, covering about 58,000 workers.
Yet there is a sting in the tail of WAP. Largely at the instigation of Belgium’s labour unions, WAP incorporates a requirement for employers belonging to the new sector schemes to pay a minimum guaranteed return in some circumstances. Currently, employees enrolled in DC type plans within a new sector plan are entitled to a guaranteed return of 3.25% when they leave their employment.
This requirement has dismayed some players in the Belgian market. Jean-Francois Schock, regional managing director of State Street Global Advisors (SSgA) Belgium, says that the US based State Street has always steered clear of guaranteed products. “The simple reason for this is that if you really offer a watertight guarantee you have to commit capital to this, and State Street is very parsimonious with its capital because of the nature of our business.
“We have a modest sized capital and balance sheet which supports huge off-balance sheet activity, so we have to be very careful about what we do. That’s why we typically would not be interested in pursuing guaranteed products.”
Asset managers argue that the minimum return guarantee inhibits the returns that occupational pension plans can earn, and therefore the pensions they can pay. Luc Vanbriel, head of institutional developments at of KBC Asset Management in Brussels says: “Employer and employees no longer have the choice. They are obliged to pay money into a system with a fixed guarantee but with less return. And we all know that 1% extra return will give a 20% higher pension but with the same premium, more or less.”
There are also fears that some of the new business that WAP will generate will be lost to insurers, who will be happy to provide a guarantee as part of their group insurance contracts.
Insurers already offer a guarantee in their Branch 21 group schemes, which account for a large portion of pension fund assets – currently some E30bn. In Branch 21 schemes, the underlying portfolio is invested mainly in government bonds and the expected long term return is close the yield on government bonds.
A guaranteed return of 3.25% is 1.25% above current risk-free rates in Europe and would be hard to achieve over the short term, says Lafont at Fortis Investments: “The new law is less an opportunity for asset managers than for insurers, because it is difficult to guarantee 3.25% in current market conditions. Only for DC pension plans accepting even a very limited value at risk, asset management services can be a solution, and probably less expensive than insurance products.”
Heymans at Petercam says that asset managers could participate , but at an unnecessary cost. “Petercam, or any other asset manager, is not going to be the one to guarantee 3.25% at any time through asset management in traditional asset categories. But we will fulfill whatever the market is asking. If an employer doesn’t want to take on the risk of guaranteed return and the insurer doesn’t want to manage it, the asset manager could do it through structured products. But there would be an opportunity cost to it. If the investment guidelines say invest in products which guarantee 3.25% then basically the client will have to pay for that guarantee with low risk but with high cost and low transparency. In the long term this will be less rewarding than if he had invested in active asset management.”
Yet some asset managers are more optimistic, Jan Longeval, director at Degroof Institutional Asset Management (DIAM), says the prediction that insurers will mop up most of the WAP assets is too gloomy. “It assumes that pension funds and employers have a very minimalist view of benefits. It also assumes that the employer doesn’t want to take on any risk within the pension plan. To think that all employers want to avoid all risk is a very severe interpretation of the law.”
DIAM, which manages 20% of all pension plans in Belgium, aims to turn the potential threat of the minimum guarantee into an opportunity with its own ‘Protect and Grow’ product. The product has been developed jointly by DIAM and Bank Degroof financial engineering team in Luxembourg. based on portfolio insurance techniques (see box on page 26).
“We are not an insurance company so we’re not guaranteeing anything. But our strategy is to protect the 3.25% minimum guaranteed level over a certain time horizon. At the same time you can invest in risk assets,” says Longeval.
“We have taken a typical asset allocation of the average typical Belgian pension fund – middle of the road, 50% of equities and 50% of bonds These are the risk assets. The risk-less assets will be zero coupon bonds. We then allocate between this medium risk portfolio and zero coupon bonds.
“What we are doing is giving pension funds an alternative to an insurance scheme. But beyond that the product has at least the potential to deliver returns way above the 3.25% level, while traditional insurance companies would find it very difficult to go above long bond rates.”
Other Belgian asset managers have decided to meet the challenge of the minimum guarantee collectively. In January, a working group of the Belgian Association of Investment Funds, including representatives of Dexia, Fortis and KBC, began work on the design of a Sicav that might square the circle of a DC pension product with a guaranteed return.
One of the problems is that corporate pension funds are bound, or will be under IFRS 19, by accounting rules that are different from those applied to insurance companies. In particular, they are obliged to mark their reserves to market. This makes it easier for insurers to offer minimum return products.
“The minimum guarantee is insurance reasoning but within a pension scheme that always has a ‘mark to market’ principle,” says Lasat at Dexia AM. “If you can play accounting rules for a pension fund in the same way as you can play accounting rules for insurance schemes, it’s pretty easy. You have a couple of additional tools to guarantee that 3.25%, because you use insurance accounting rules and not ‘mark to market’ rules on the one hand, and you also use accounting rules on a pool of assets rather than on individual assets.”
The working group is now considering the possibility of creating a Sicav which would combine investment and insurance accounting principles. “It would be a collective investment scheme, but with the accounting rules of an insurance company. It would be a perfect investment instrument because it would be portable and perfectly transparent, with individual accounts and segregated investment funds. It would also suit the social aim of the WAP to guarantee financial returns,” says Lasat.
One of the benefits would be to encourage employers, who might have been frightened off the guarantee, to participate in the new sector plans. It could also provide the institutional asset management industry with the product it needs, he says: “We are thinking a little bit out of the box. It could be a catalyst for the development of something new and exciting in the pension fund industry,” Lasat suggests.
In other words, Belgian institutional asset managers may have found the institutional equivalent of the Belgian dentist’s favourite investment.

Topics