Average returns for Belgian pension funds in 2004 were not particularly good, according to Koen de Ryck, chairman and managing director at Pragma Consulting. According to data from the Belgian Association of Pensions Institutions (BVPI) returns averaged 8.93%.
The major issue within the pensions industry in Belgium last year was the new pensions law and its implementation, De Ryck says. “The new law brings quite a lot of obligations for the pension funds, and there are the accounting rules too. Life does not get simpler, unfortunately.”
What gets overlooked in the legislation process is that employers are less and less interested in defined benefit plans. “They are discouraged by all these obligations, and this is a major issue,” he notes.
Hugo Clemeur, secretary general of the BVPI, says that the association is worried about the minimum interest guarantee – of 3.75% on employers’ contributions and 3.25% on employee contributions – in DC plans. Clemeur says the BVPI considers this basically too high, and not realistic in the current circumstances.
Within asset classes, De Ryck says Belgian pension funds still have high allocations to fixed income. Real estate has done very well over the last year, but overall, the allocations to property are not very high. “With alternative investments, there is a lot of talk, but not much action,” he adds.
Investment performance at the Suez Tractebel pension fund fell in 2004 from the year before. On an unhedged basis, the portfolio return fell to 7.9% from 8.0%, while on a hedged basis, it dropped to 9.8% from 11.3%, says Olivier Poswick, head of portfolio management at the fund.
“In 2004, we mainly took profit from the fact that we increased our allocation in real estate from 5% to 10% at the end of 2003, and also from our allocation in Belgian equities that represent 10% of our European equity portfolio,” he says. “The currency hedging against the US dollar was very profitable. Our policy is to be fully hedged against the US dollar and the British pound as the expected return in the long term on currencies is 0%, but the currencies add some volatility.”
The fund began taking this approach at the beginning of 2002, when it put a currency hedge in place.
Looking ahead, Poswick says that the challenge for the next year will be to put a stress test model in place to manage the fund’s new strategic asset allocation implemented in 2003. Another point will be to improve the currency hedging approach. “But we have to make the difference between currency hedging and currency overlay management,” he says.
Suez Tractebel is changing its approach to manager selection, giving up the old RFP method. All asset managers have already prepared their answers for RFPs, so you cannot learn anything through this, says Poswick.
“We prefer to have a lot of meetings with asset managers and to speak to them about some points – not necessarily only about their approach, but about the market and the environment as a whole,” he says. This is the best way to ascertain their understanding about what they do, he adds.
At 12.48%, KBC pension fund achieved above average investment returns for 2004. Managing director Edwin Meysmans attributes the success in part to the fund’s level of investment in Belgian equities, which is higher than would normally be the case for a European pension fund, he says.
“Belgian equities did excellently – they scored around 30%,” he says. Bond investments were 100% in euro, and with the decline of the US dollar against the euro, that was not so good, he adds.
At the end of 2004, KBC had 59% of assets in equities, 33% in bonds, 6% in property and 2% in cash.
Over the next year, the fund faces the challenge of dealing with falling interest rates. While this is good for the existing bond portfolio, it makes it difficult to invest new money, he says. In theory it could be invested in equities. “But 60% is really the maximum,” he says. “We won’t go further than that.”
But the fund is gradually building up its real estate portfolio. “We have just been doing an ALM study, so we are looking at new investment strategies, but they are not finalised yet,” he says.
Currently, more than 90% of the pension fund’s assets are run by KBC Asset Management, but the direct real estate and private equity investment are conducted in-house by the fund itself, says Meysmans.
At Amonis VKG/CPM, the pension fund for doctors, dentists and pharmacists, the 2004 return was 14% on a euro-denominated basis.
“We had a very strong return on our bond portfolio, combined with a very strong performance in real estate, emerging markets and small and mid cap European stocks,” says Tom Mergaerts, actuary at the fund.
The fund’s allocation is 42% bonds, 9% real estate and the rest in equities. Asset management is completely outsourced, although pensions administration is done in-house. Mergaerts says that he foresees little change to overall asset allocation.
“We are continuously evaluating our asset allocation, but our portfolio is put together from a diversification point of view, so this means we are not going to make immediate changes to the portfolio,” he says.