Cross-border push must bridge credibility gap
Belgium's pension fund market is tiny compared with that of its neighbour, the Netherlands. But its ambition far outweighs its size. In July last year the Belgian government passed legislation enabling pan-European pension funds to operate in and from Belgium.
Tax changes were also made to remove the annual tax on pension fund capital and capital gains tax. The changes created a purpose-built vehicle for occupational pensions, the Organisme pour Fonds Pension (OFP) for the first time in Belgium. The vehicle is available not only to Belgian companies for domestic and cross-border investments but also to multinational corporations looking to centralise pension provision in a single European country.
But Belgium has some stiff competition in Luxembourg and Dublin if it wants to set itself up as a centre for pan-European pension funds.
"The idea of Belgium as a centre for pan-European pension funds is realistic, but that doesn't necessarily mean it will become reality," says Renaud Vandenplas, head of location for BNP Paribas Securities Services in Belgium.
"The new framework for cross-border pension funds is extremely attractive and is based on international guidelines, which are well known to international investors.
"Moreover, the tax is lower than in Dublin and Luxembourg and in using a Belgian vehicle, investors will get increased returns on dividends, which is important when they are looking to squeeze every last drop of return out of their investments."
Bruno De Geest, managing director brokerage clearing and custody at Fortis Merchant Banking in Brussels has reservations about Belgium's prospects. "Despite the legal changes to improve the situation in Belgium, the pension funds business is not well established here.
"The legal changes are welcome, but there are some specific market characteristics that could dampen a huge increase in the number of Belgian pension funds," he maintains.
De Geest says Belgium's pensions industry would need to attract more people with specialised knowledge on how to set up and run a pension fund. In addition to that, the Belgian economic landscape is one of multiple small to medium-sized enterprises, for which it is difficult to establish a proprietary pension fund.
Size (in terms of assets under management) is important to drive performance of a fund, he adds.
"Dublin, Luxembourg and the Netherlands are very well established pension funds markets - they have the people, knowledge, assets, systems and client base. Moreover, insurance companies dominate the Belgian pension services market. It will be a tough task to try to overturn all of that," says
Vandenplas identifies two challenges to Belgium's success in the pan-European pension funds arena - its first-mover status and credibility.
"From a regulatory point of view, there is a lot of flexibility in terms of management of the funds and Belgium is a very well regulated market. But Belgium is a first mover in this field and other countries may react quickly and catch up," he says.
"Also there is a credibility challenge. Luxembourg and Dublin are well known funds centres and it is not natural for an international fund manager to think about Belgium in this context. It is up to the industry in Belgium to show that we are serious about this and that we can offer good services and the best returns. If we can gain that credibility, then within about three years, Belgium should have taken a fair share of the market."
n its Pensions Market Focus published in October 2006, the OECD said total pension fund assets in Belgium represented 4.2% of GDP, small beer compared with its neighbour the Netherlands, whose total pension fund assets are 124.9% of GDP, and the UK, where the figure is 66.2%.
The Dutch situation, the OECD says, is partly due to the relatively small size of its economy compared with its very developed financial and pension fund markets. Personal and occupational schemes are voluntary in Belgium and the majority - 75% - of occupational schemes are defined benefit (DB). The majority of assets are invested in mutual funds.
In 2005, total investments of pension funds in Belgium were $15,430m (€11,849m). Of the 25 countries for which the OECD had data, only Belgium and New Zealand recorded negative growth rates of assets to GDP in the years between 2002-2005.
In February, BNP Paribas appointed Luc Dawans head of fund administration operations in Belgium, in a move to strengthen its activities in the fund administration arena in the country. Previously, Dawans was at RBC Dexia's investment operations division for five years, the last two of which were as head of fund administration.
In addition to the appointment, the custodian has also launched a number of new services including investment compliance monitoring and improved regulatory reporting for locally domiciled funds.
Dawans will head the development of new service solutions as the Brussels fund administration office expands. He reports to Vandenplas.
"BNPPSS has recently entered the fund administration business in Belgium and we intend to develop our services in this arena," says Vandenplas.
"This will enable us to tap into new client types in addition to our broker dealer and global custodian clients. We intend to target both international and local fund mangers with the fund administration offerings," he says.
At Fortis, insurance companies remain the focus of activity. "Currently, the pension fund business in Belgium is dominated by insurance companies," says De Geest. "Thanks to tailor-made products, insurance companies are able to service Belgian enterprises with pension services. They drive the market here and are for us, as a global custodian, our main client base for securities services.
In order to make their operations as efficient as possible, insurance companies have been consolidating their positions to one or two custodians.
De Geest continues:"Moreover, again to optimise their return on investments, we have seen a huge interest in our combined service offering of global custody services together with securities lending. A recent change to the laws in Belgium has enabled insurance companies to increase their activity in securities lending."
Vandenplas says the imminent dematerialisation of shares, which starts on 1 January 2008 and will end in 2013, has placed extra work on securities services firms and others in the Belgian funds industry. "There are still many physical securities in the Belgian market and banks will have to take on extra work as they are handed in," he says.
The abolition of bearer securities is designed to promote the use of dematerialised securities and encourage the book entry of registered securities. The Belgian authorities have taken a phased approach, given the complexity of dematerialising share certificates. Euroclear, the local central securities depository is working on implementation of the law regarding dematerialisation along with pan-European exchange Euronext and the Federation of Belgian Enterprises.
They have set up a dematerialisation task force that will prepare for the implementation of the law, which covers shares, profit-sharing certificates, bonds, warrants and beneficial shares issued by companies governed by Belgian law in accordance with the Belgian Companies Code.
It also covers public debt securities such as treasury and deposit certificates and all other securities issued by a person subject to Belgian Law and which represent a financial claim on the issuer (real estate certificates, for example).