Gaps in the landscape
While the authorities hope the new OPF vehicle will attract foreign pension funds to base themselves in Belgium, the domestic second pillar is not as robust
as it should be, George Coats finds
The introduction of the organisation for financing pensions (OFP) as the new legal structure for pension funds and new regulations on governance are changing Belgium's pensions landscape.
The OFP represents a revolution in pension delivery, according to its supporters. It has attracted most notice because in addition to being the new model for Belgian occupational pension schemes it was designed to be a vehicle for cross-border and pan-European pension funds. The authorities hope it will attract multinational corporations with operations in several countries to pool their various pension operations and domicile them in Belgium.
"Our regulation is built on an ALM basis because companies are different, funding structures are different, asset allocations are different and the employee structure differs from company to company," says Philip Neyt, chairman of the Belgian Association of Pension Institutions (ABIP/BVPI) and former head of the Belgacom pension fund. "It is based on a qualitative not a quantitative one-size-fits-all approach, so it is flexible. Although controls are in place and are much tougher than in the past, they are fund specific. Our regulator, the Banking and Finance Commission, will evaluate pension fund proposals on a case-by-case basis. It will be looking for consistency between the plan, the plan rules, the funding, the asset allocation policy and funding policy. And it has built a risk model with a large set of criteria by which it can evaluate all pension funds and assess which it should examine more closely."
"The first requirement for all the pension funds I contact these days is to amend their by-laws so they can change into an OFP. And the second thing they ask is what they have to do now to meet the new regulatory requirements," says Karel Stroobants (pictured left), a veteran of the local pensions arena and now an independent director. "They have a checklist from the Banking Commission of things that have to be done but when they see the cost and the consequences of it they start asking questions about the necessity and the added value of it all. The new regulations will have huge consequences on the cost side for most Belgian pension funds."
"All pension funds are now facing a requirement to have an internal auditor and a compliance officer," says Edwin Meysmans, managing director and pension fund secretary of the corporate DB pension fund of KBC.
The introduction of the new OFP vehicle and the requirement that all pension funds adopt it within five years, together with the new regulations to ensure that they meet governance requirements, have come at a time of growing awareness that Belgium's second pillar coverage is relatively low. In recent years governments have attempted to encourage occupational provision by removing legal obstacles to multi-employer schemes and laying the legal basis for sector-wide funds, but some industry players feel that the various government initiatives have been piecemeal and that there is no overarching strategy.
"In my opinion there is no overall view at all," says Frank Rummens, a consultant at Pragma Consulting. "And the government has other priorities at this moment - Belgium is in a political crisis."
"All pension funds will need to make some kind of ALM study," says Stroobants. "They need to do something about compliance, internal control and internal audit, and on top of that come the governance requirements for training, insurance - the Banking Commission has already said that training and insurance are recommended - and independent directors. That will add an extra of €15,000 to €25,000 a year to their existing costs. To put it another way, it could quite quickly become an extra 7-10 bps, and that's a substantial amount - it almost doubles the costs of some funds. For the 150 smallest ones the cost could even be as high as 20 bps. This could put considerable strain on the occupational pensions market.
"Currently, there are approximately 250 funds in Belgium, and they have total assets under management of €15bn," continues Stroobants. "If you take out the 10 biggest and divide the remaining amount by 240 you see the average size of a pension fund is about €35m."
"On the basis of 2006 figures the overall second pillar pensions market is in the region of €50bn," says Meysmans. "We estimate that pension funds account for about 30% of the second pillar, and about 70% is still in the form of group insurance contracts. There are 20 or so pension funds that we in the Belgian market consider large, with more than €125m. There are four pension funds with around €1bn in assets - the largest being Suez-Tractabel with more than €1.5bn, and then come Amonis, KBC and Alcatel. And there are the multinationals, IBM, Johnson & Johnson and so on, that have €200-500m or so, and the funds of the banks."
"Apart from the question of viability of the smaller pension funds, the question is whether the smaller 150 schemes will be able to manage the process," says Stroobants. "Giving the order to do an ALM is one thing, but are they capable of communicating with the experts in the ALM field? Can they implement the results of an ALM given the size of a fund? In my experience the classic ALM providers do a good job but find it difficult to communicate with a board that often has no competence or experience in this field."
He adds: "Sooner or later that will be felt by the plan sponsor that will have to pay. So I see a big challenge coming into the market. Some companies are going to do it because they have set a principle to have a pension plan, but I'm sure that a lot will ask whether this is the most efficient way to fund their pensions. More creative solutions like smarter or more efficient outsourcing and pooling will become necessary and if not, group insurance will become the sole alternative."
Meysmans agrees. "DB or DC is not going to help them with governance issues because the governance requirements are very much the same, although the financing may be a bit easier on the DC side than the DB," he notes. "So what are their options? One is to stop with the pension fund and go to an insurance company. Some smaller employers and smaller pension funds are probably considering going that route. But I'm not sure they know what the benefits and disadvantages of that formula are."
"Insurance contracts are still important in Belgium and companies have no problems with this despite the fact that the return with such an option is smaller," notes Rummens.
But Meysmans says there are other alternatives. "Another way is to group the pension funds together. But although the theoretical framework is there nobody is doing it."
Previously, pension funds could only combine if they belonged to organisations that had an economic or social link. "That requirement was abolished by law in 2000 but at the time the implementing measures were not there," says Lut Sommerijns (pictured right), secretary-general at the ABIP/BVPI.
"The companies that might be considering being involved in a multi-employer pension fund were waiting for the new prudential framework to clarify issues regarding the organisation and structure of a multi-employer pension fund. And some bigger players are considering whether there is an interest in regrouping smaller pension funds into one bigger multi-employer pension fund. This is being analysed at this moment.
"But the governance directive was only communicated last May and has only been in the implementation process at the biggest pension funds since the end of last year. We at the ABIP/BVPI are especially looking into the problems confronting the smaller pension funds and trying to assist them. It might still take several months for smaller sponsors have understood what they have to do and have analysed the financial and human resources pros and cons and be able to take decisions in that respect. Then we may see moves towards implementing multi-employer pension funds."
Rummens does not see this as a realistic option. "They have to merge or to find other solutions, but at this moment they are still proud of their independence so no-one is interested."
Another alternative is to form sector-wide pension funds, foreseen under legislation passed by former pensions minister Frank Vandenbroucke in 2004 and known as the Vandenbroucke law.
"The sectoral approach is an initiative at a different level because it is the result of negotiations between social partners at industry-wide level rather than between smaller pension funds linked to smaller sponsors," says Sommerijns. "So while companies can give information to their employer federation or to the trade unions the initiative to set up a sector pension fund comes from the social partners."
"In the four years since the Vandenbroucke law we can see that it did not bring the boost that all of us were hoping for or expecting," says Meysmans. "Still there have been some moves."
And there are still gaps in the system. "There has been talk for quite a while suggesting that the second pillar should be made mandatory," says Meysmans.
But is it an issue? "Ultimately a pension is a benefit and a benefit depends on the demand from our employees," says Neyt. "A company considers giving compensation benefits for various reasons - to attract and retain good people and so on - but there does not appear to be a demand for second pillar pensions. It is a deferred wage, and most people will not even ask whether a company has a pension plan."
Meysmans disagrees: "We are finding that the KBC recruitment staff are calling us to say ‘here's another guy who wants to know about his pension', when previously somebody aged 25 or so being interviewed for a job never asked about the pension. Now it's not just do you have a pension but what kind of pension, what kind of guarantees?"
This may be because people looking for a job in banking are more alert to the need for a pension but Sommerijns feels there has been an evolution. "There has been a growing awareness about the need for pension provision among the Belgian population over the last few years," she says. "Young people are now really looking at their pension. It is something they raise during the recruitment process."
"If you go back to the beginning of the process and ask why doesn't it work, the answer is very clear: it's too complicated," Neyt says.
"Social legislation, which is country specific and so only applicable to Belgian plans and not to any pan-European pension funds established in Belgium, is over-complex so people don't understand it. The pension rules run to an addendum of 50 or 60 pages on an employment agreement because it must be legally correct. Who will read that? No one.
"And the annual statement is also far too complex. If it is not made simpler the second pillar will not be a success in Belgium. However, employers point out that lawyers say they have to include certain phrases. I tell them employees want to know only three things: what rights they have built up, what they will get at the normal retirement age and what they would get at early retirement. That's all they want to know and they don't care about the rest.
"It would help our case if there was more demand from the trade unions, and if there is demand from the unions then it would attract political backing. But there is no demand so the politicians have no interest.
He adds: "We lobby the government to introduce less complex legislation. But in addition, every employer and HR department still has to do a better job to communicate the advantages of an occupational pension to their employees."