The Belgians like to keep it simple both in terms of regulation and investments. This has served its pension fund industry well over the past few years. Moreover, on the eve of a tax windfall in the form of the new legal entity, the Organism for the Financing of Pensions (OFP), 2006 gave Belgian funds much to look forward to.

And marketing the OFP as the spearhead of Belgium’s push to become a pension domicile under the EU’s pensions directive has caused some upheaval, especially in the Netherlands where the authorities fears Belgium is baiting the hook for Dutch pension funds.

Late last year, chairman of the Belgian Association of Pension Institutions (ABPI), Philip Neyt, who is the driving force behind the Belgian legislative changes, found himself in the middle of a feud with a worried Dutch regulator. Pension funds could be faced with disappointing results should they move to Belgium, the regulator warned, adding that Belgium is trying to “sell a car without having the technical specifications yet”.

In the meantime, both the ABPI and the Belgian pension supervisor, the CBFA, have announced they have already received several applications from foreign pension funds that want Belgian citizenship. Although the first fund is yet to move, the prospects appear promising because the European pension community is positive about the regulatory changes.

Besides happy regulatory tidings though, a retrospective of last year’s investments has also left funds satisfied. On average, Belgian occupational pension funds in 2006 saw a return of 9.25% according to the ABPI, which conducts an annual survey of pension funds.

Although some might argue the 9.25% average return appears less upbeat when compared with 2005’s 14.96%, Fabian de Bildering of the ABPI comments: “If we had returns like this every year, very few people would complain.”

Edwin Meysmans, managing director at the €900m KBC Pensioenfonds, Belgium’s third-largest scheme, which posted a 2006 return of 8.8%, echoes De Bilderling’s view. “It is the fourth year in a row that we have had decent returns,” he says.

Notwithstanding a traditionally more conservative approach to investments in comparison with more developed markets such as the UK and the Netherlands, Belgian funds’ greater weighting in equities managed to further push up assets in 2006.

The ABPI survey shows that, at end-2006, equities were the largest asset class making up 44% of the average portfolio, just ahead of bonds, which had a 40.5% share. A long way behind came real estate (7.9%), liquid assets (5.4%), and other assets (2.2%).

For the average fund, equities returned 13.4%, with mostly the European and emerging markets shares pushing up the results. Belgian funds also profited from real estate investments.

“Generally speaking, the pension funds that in 2006 invested more in equities had better results,” De Bildering says.

Though this held true for most of last year, pension funds experienced bumpy periods. “We started very strong in January and February, which was in a way a continuation of the strong results of late 2005, but in May we had a serious set-back,” Meysmans recalls. “With a negative return of 3.16% it was a very bad month, so much so that at June 30 2006 we were barely positive with 0.73%.” Only in the summer did results pickup again, pushing the fund to 8.8% at year-end, he adds.

Nevertheless, KBC decided to reduce its equity portfolio: “As we do every three years, in 2006 we did an ALM study. As a result we have reduced our strategic equity portfolio to 50% from 57%, while increasing the bond portfolio to 40% and real estate to 10%,” explains Meysmans. KBC now has a tactical equity allocation of 53% and just above 36% in bonds, as it has better prospects for equities rather than for bonds.

But are Belgian funds ready to move away from the more traditional asset classes? No, says De Bildering. He does not foresee any major changes to the equities/bonds equilibrium in the near future.

Karel Stroobants, a consultant at Akkermans Stroobants & Partners, agrees, saying that it is mainly the larger funds such as the Amonis fund, the €990m scheme for Belgian medical professionals, or Suez Tractabel pension fund, Belgium’s largest at €1.5bn, which look towards liability-driven investments (LDI) or alternatives such as hedge funds.

It is a given that smaller funds have systematically performed less well than larger funds - only the three largest funds achieved returns above 15%. However, funds do not respond to short-term results. “Due to a more pragmatic approach to regulation, funds in Belgium don’t panic so much over the short haul as do those in the Netherlands for instance,” says Stroobants.

“In Belgium, the long term is still more dominant because of regulation. Particularly for pension funds that don’t have to report following the IFRS, the problem of co-ordinating the volatility not the first priority.” Nonetheless, in June KBC adopted an LDI strategy for its bond portfolio.

“Until recently we had a traditional bond fund, 100% invested in euro,” says Meysmans. “We have sold all of that and we replaced it by an LDI ‘constant duration bucket’ fund, consisting of bonds with various durations.” He anticipates that other funds will follow suit.

To match its liabilities, KBC has also rearranged its real estate portfolio. A few months ago the fund lowered listed European real estate as it expects less returns for the asset class, while switching to non-listed real estate and venturing into infrastructure funds. KBC expects these investments to be a better match for future liabilities as they are stable on the long term with good returns. Last, the fund has also allocated a small amount to timber, to get a taste for this relatively new asset class, says Meysmans.

Stroobants notes another trend, which he calls the “creative and modern execution of infrastructure”.

Large sector funds and first pillar funds in particular are looking to interesting projects in the financing of school buildings, care homes and hospitals.

“These provide stable cash flows in the long term,” says Stroobants. However, he has picked up that though there is such a demand among pension funds, the offering still needs to be structured.

As for the returns in 2007, expectations are low. “I don’t have a crystal ball but, if I look at the stock market evolution - Belgium is always internationally diversified, with 40% to even 50% invested in equities - then performance until now is probably not going to be splendid,” says Stroobants.

KBC does not expect returns to be as good as last year. “It will be difficult to top 2006,” says Meysmans. “On June 30 we were at 3.63%, which is much better than what we had at the same time last year, when it was only 0.73%.” However, he fears the difficulties that the market experienced mostly in the last week of July when declining bourses set back the fund significantly.