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Belgian pension funds slash liability discount rates

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Many Belgian pension funds significantly reduced their discount rate for liabilities over the past year, lowering the level from approximately 4% to in some cases less than 1.5%, according to industry organisation PensioPlus.

A survey of 62 schemes – representing €19.2bn, three-quarters of Belgian pension funds’ assets – indicated that more than a quarter of funds now apply discount rates of less than 3%.

Supervisor FSMA said it was satisfied with this development, but it made clear that many schemes still had assumptions for future returns that were “too optimistic”.

Henk Becquaert, board member of the watchdog, said FSMA was in discussions with schemes about reducing discount rates deemed to be too high. He declined to be specific about the numbers of pension funds involved.

Becquaert said there were still investment consultants who recommended assumptions for returns that were too high.

He said the supervisor took into account the expectations of international bodies – such as the International Monetary Fund and European Systemic Risk Board – but didn’t publish maximum figures, like the mandatory parameters in the Netherlands. “As long as pension funds listen to us, this isn’t necessary,” he said.

PensioPlus, which presented the survey results during its annual congress this week, said the lower discount rate had a negative effect on coverage ratios.

The 28 pension funds that produced figures saw their funding drop from 123% to 115% on average last year. The pension fund of bank KBC reported that it had to raise contributions in the wake of the reduced assumptions for returns.

Pension funds in the Netherlands must discount their liabilities against the risk-free interest level. Dutch pension rights in Belgium-based cross-border schemes are subject to a discount rate equal to the Dutch discount rate for individual value transfers, which is 0.864% this year. In 2016, the rate was 1.629%.

As a result of this decrease, one pan-European pension fund with Dutch pension rights incurred a “limited funding shortfall”, according to FSMA.

The supervisor added that arrangements had been made to rectify this through an additional payment from the sponsor, who is legally bound to fill funding gaps.

Becquaert warned that further professionalising was necessary, in particular for small funds (less than €25m) and some medium-sized pension funds (up to €125m), adding that co-operation or merging into multi-schemes would help.

Philip Neyt, chairman of PensioPlus, also called for co-operation, particularly with insurers. He noted that insurers were establishing pension funds for their staff. Neyt said he expected that others would be allowed to join as well. 

At the congress, concerns were voiced about how schemes’ participants should be informed about the risks following a transition to defined contribution arrangements, how they could be assisted with investment choices, and how pension funds can keep control of costs. FSMA said it expected additional EU regulation on expenses.

Last year, Belgian pension funds achieved nominal returns of 5.07% on average.

According to PensioPlus, many of them were divesting government bonds in favour of equity, credit, emerging market debt, and illiquid investments, in part as an inflation hedge.

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