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'Real' danger that funds may not meet guarantees

BELGIUM – The probability of Belgium pension funds not being able to meet the new 3.25% guarantee rate laid down in January’s Vandenbroucke pensions law is slim, but nonetheless represents a real danger, according to research by the Brussel’s operations of consultant Deloitte & Touche.

The study entitled "Impact of guaranteeing a minimum return: analysis based on historical returns" by Geert De Ridder, an actuary at Deloittes, takes as its departure point the historic returns of the Belgium bond and equity markets between 1961 and 2000.
Against this market background it compares the performance of a fund invested 100% in bonds and another split 50-50 between bonds and equities.

The first fund, says De Ritter, would return an average of 7.5% over 40 years with the mixed fund slightly higher at 9.5%.
Using an average inflation rate of 4.2%, the research shows that the standard deviation for the funds comes out at 5.3% for the bond fund and 10.8% for the mixed portfolio.

As a result, the probability that the bond fund would undershoot the 3.25% guarantee rate comes out at two per cent, while for the mixed fund it doubles to four per cent.

Over a shorter time frame of 20 years between 1981 and 2000 and using a lower average inflation rate of 3.2% the bond fund returns 9.9%, while the mixed fund produces 13.5% - creating less chance of underperformance at 0.1% and 0.2% respectively.

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