EUROPE – Equities have been made the scapegoat for pension scheme underfunding, says Karel Stroobants, the former president of the Belgian pension fund organisation.

“Underfunding was a fact and a scapegoat needed to be found,” Stroobants says. “The fact that equities received this qualification was made even easier by the fact that at the same time and in the period shortly after, bond yields surged, fuelled by a substantial interest-rate cut.”

Stroobants was writing in a new 20-page IPE publication, “Rebuilding Value - irrational despondency follows exuberance of the equity bubble”, an occasional series written by investment industry leaders.

Stroobants, who is chairman of the advisory board of FundPartners in the Netherlands, perceives a shift following UK retailer Boots’ decision to swap its entire equity portfolio for bonds. “Since then,” he says, “investing in equities has been regarded more as a deadly sin than an act of prudent management.”

But he says equities do have their place, provided there are certain conditions in place. “Equity had and still has a place in the asset allocation of a pension fund,” Stroobants says.

“However, if one wants to invest in equity then the pension fund should have at its disposal a good governance structure, it should make realistic assumptions concerning expected returns and it should install and monitor risk budgets.”

“Decent diversification and the use of techniques such as currency overlay, structured products and hedge funds can have an important added vale to better match the risks,” he adds.

The publication features seven papers, with contributions from T. Rowe Price, Frank Russell Co., FundPartners, Deutsche Asset Management, F&C Management, State Street Global Advisors and Fidelity Investments.