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IPE special report May 2018

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Integrale's long track record

Belgium has a long tradition of pension provision that has undergone many reforms through the years. Some players have been present in this market since its very early days, adapting themselves to the different social environments. Liège-based Integrale is one of them.
Decades ago the way the Belgian state managed public pensions had little to do with the current system. In the beginning, state pensions in Belgium were managed by private institutions. In this environment, back in 1925, Integrale was created. The idea came from a number of companies that decided to join forces and set up a multi-employer pension institution to provide first pillar pensions to their employees. Later on, when the state pension system moved from its capitalised origins to a pay-as-you-go structure, the accumulated reserves were transferred to the new system. At that time, Integrale decided to continue operating in the same way, as a multi-employer organisation, but only focusing on second pillar complementary pensions.
Today, Integrale manages pensions for around 350 companies all across Belgium, including big corporations, small and medium-sized enterprises. It provides retirement plans for around 35,000 employees and its assets amount to E765m.
The difference between Integrale and other multi-employer pension plans operating in the country is its structure and management arrangements, which are still unique in Belgium.
Integrale is neither a pension fund nor an insurance company, although it presents similarities with both. Internally, its activities are a similar to that of a pension fund, but its management framework is different. The management board is composed by half employer and half employees representatives, and the organisation distributes the total net returns on investment among all its insured members. Legally, is closer to an insurance company and in fact is controlled by the official body in charge of supervising insurance companies’ activities in Belgium. In this way, for instance, Integrale respects the rules regarding prudence on investment that insurance companies follow.
“Although internally we operate as a pension fund, legally we have the structure of an insurance company,” says Paul Roels, secretary general at Integrale in Brussels. “We follow the accounting rules and standards of insurance companies, which are different from pension funds.”
Summing up, and using the French terminology, Integrale is a ‘caisse commune d’assurances’ operating under specific legislation and whose only activity is the provision of pensions.
“In this organisation both employers and employees are equal and we don’t have any private shareholders,” says Roels. “The only thing Integrale does is pensions and all the benefits we obtain are distributed among our members.”
Integrale controls both the administration and the investment side of the pensions it looks after.
When it comes to investment, Integrale’s philosophy is that a multi-employer structure like theirs, where contributions from different associated companies end up in the same pool of assets, allows them to achieve investment diversification and reduction of risk at the same time as it places the organisation in a better positions when it comes to deal with external asset management houses.
Having to provide a guaranteed annual return of 3.75%, the investment strategy is conservative, with more than half of the total assets being invested in fixed income. The most recent figures on asset allocation show that assets invested in international bonds represent 44% of the total portfolio, woth an extra 8% of total assets invested in Belgian government bonds. Real estate amounts to around 9% of total assets and the proportion invested in equities only represent 11.3%. “The fixed income part of the portfolio is managed in-house but we have appointed external managers for some equity mandates, and we will outsource more,” says Roels.
For selecting managers, Integrale has developed a long questionnaire which focuses not only on track records but also on the quality and expertise of the people behind the asset management firms. “Fees are also something that we obviously need to take into account but it is not our main criterion during the selection process,” Roels comments. “We know that sometimes you pay low fees but you don’t get the expected results, so we prefer to hire someone that works well for a fair price.”
Buying expertise from external providers is not only limited to the asset management side. Integrale also uses, when its’s needed, external consultants and actuaries to help them. “If you are in the pension business today you need external experts,” says Roels. “Ten years ago you could go to your actuary and he would give you the answer. Today, you need a combination of an actuary, a lawyer, an accountant, and so on.” He adds that their approach to using external advisers is focused on individuals as opposed to firms: “We are not hiring names but persons.”
In terms of returns, the fund has obtained average net returns of 7% during the last decade and its high exposure to fixed income has provided them with positive returns during the recent downturn in the equity markets.“The fact that a big portion of our assets is invested in fixed income means that we have suffered less than funds that are investing more aggressively in equities, so we are still getting an interesting return for our members,” he says.
These results contrast with the disappointing performance of the Belgian pension fund industry as a whole which, after the zero return registered in 2000, ended 2001 with negative results. The impact of the market downturn on Belgian pension funds, which, on average, invest more in equities than in other countries in continental Europe, has increased concern among investors about their approach to investments. Also, the Vandenbroucke law, which could finally come into force in the next few months, introducing a minimum return guarantee of 3.25% for DC schemes will definitely impact the way pension funds are managing their assets.
“There is an obvious relation between risk and return. Either you go for a guaranteed return and you get maybe a bit less over the long term, or you go for high return and take the risk of doing worse,” says Roels. “In my opinion, pensions are not just another investment product because it has to provide members with a decent income on retirement.”
Another important issue that is changing the Belgian pensions landscape, and also a consequence of the Vandenbroucke law, is the introduction of the industry-wide pension funds. “Sector agreements are no longer just an idea for the future but a fact,” Roels says. “There is a lot of debate in the market about this, regarding who is going to manage them and how.”
In the developement of the sector funds in Belgium the acceptance among the unions of the need for boosting the second pillar has been crucial. “Trade unions have always been defenders of the state system for pensions, but now they are beginning to understand that the levels of social security are being reduced,” he comments. “Today, they are not so negative towards the development of corporate pensions because they understand that there is a need to supplementing the first pillar which can be done through capitalisation. The fact that unions are talking about the second pillar in a more constructive way has been an important achievement of this government.”
Integrale has just been appointed to administer one of these new plans covering workers from metal-related industries. After sending questionnaires to different providers, Integrale was chosen among eleven insurance companies because it met the new fund’s requirements regarding structure and transparency in addition to having a good track record in managing pensions.
Actively participating in such a significant development in the Belgian market, like the creation of sector funds, Integrale is also showing interest in finding out more about another important issue that institutions are discussing at this moment: the development of socially responsible investments (SRI) and their future role in institutional portfolios.
Already having a good track record on corporate governance with a committee that supervises the salaries of its directors and another that keeps a close eye on all the investment activities, Integrale’s interest on SRI doesn’t come as a surprise. However, the approach they are taking on this issue is a prudent one. At the moment they are studying the subject in-depth, trying to clarify the uncertainties involved in this area.
“SRI is coming to this market and this is also a consequence of the new law,” says Roels. “Everyone is talking about it but there is still a lot of uncertainty in the market. We are not yet clear about what the standards are and who controls them.”
Although he believes SRI is here to stay, he suggests that this market hasn’t as yet matured. “At present, there is no agreement in the market on common standards, neither is there a consensus on methods for controlling them.” He adds: “We are not too far from finishing our study on the issue. We’ve been talking with a lot of people who know this because we want to do it properly and it is not an easy debate.”
The outcome of this study could set the standards regarding SRI that Integrale would follow in the near future. This and other developments in the Belgian pension market as a whole will keep the management busy in the months to come.

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