Belgium: A DC future: KBC Pensioenfonds

• KBC Pensioenfonds
• Location: Brussels
• Assets: €1.2bn
• Active members: 15,500
• Deferred members: 2,000

KBC has introduced a DC pension fund for new members starting from the beginning of 2014 and closed its DB fund. The fund is one of Belgium’s largest pension schemes, founded in 1941 with €1.2bn in assets and 15,500 active members.

The problem for sponsors like KBC is that the requirement under IAS 19 for assets and liabilities to be marked to market makes meeting Belgian regulatory funding requirements potentially expensive and unpredictable.

“We decided to make this change because accounting standard IAS 19, applied to our DB scheme, has the consequence of increasing balance sheet volatility, while the DC plan does not carry the same volatility,’ notes Edwin Meysmans, director of Pensioenfonds KBC.

The previous corridor valuation method offset this volatility, so KBC felt the change to DC was prudent now that that approach is no longer permissible, Meysmans adds.

The new DC fund will not be less generous than the old DB one. “On the contrary, we have preserved member benefits and the key difference lies in the accounting treatment of our liabilities in the DC scheme,” says Meysmans. “We as sponsor are still obliged to return a minimum of 3.25% per annum on sponsor contributions but this liability comes at the member’s retirement age, allowing us to invest for longer term growth.”

KBC’s DC scheme is not an insured arrangement. The reason for this is that DC contracts via insurers must return 3.25% annually, not on a cumulative basis and any shortfall must be met by the sponsor within 12 months. “This means that insured schemes tend to hold a high percentage of bonds,’ Meysmans adds. “They are more expensive to fund than the type of plan we are running, where we can run a higher equity weighting.”

Aggregate returns for 2013 were only around 1% but there are good reasons for this. The portfolio is 35.7% exposed to a swap portfolio designed to eliminate interest rate and inflation risk in the scheme. Returns on this part of the portfolio were negative, -10.4%, for the year. The other portion of the scheme portfolio is invested in equities, bonds, real estate and some alternatives. The return on this side was 11.2%.

Equities accounted for just under 39.8% of portfolio value; the scheme’s strategic asset allocation is 35% to 40% for equities, so this is close to the upper tolerance level. “Our exposure to equities reflected our view on where returns would come from,” adds Meysmans. “The significant change here is that we have only a small allocation to euro-denominated government bonds and have shifted to corporate, high yield, and emerging debt in search of positive returns,” Fixed income and cash account for 12.6% of assets.

Overall, Meysmans believes the fund’s performance successful. “What you see is a negative return on the hedging portfolio, but it takes risk out of the portfolio,’ points out Meysmans. “The main factor is the discount rate we use, based on AA corporate bond rates.” This is a low and, therefore, relatively expensive discount rate compared to the higher rates used by many other Belgian DB schemes.

“Aggregated returns may sound low, but liabilities have been matched,” Meysmans adds. “Hedging risk has improved our coverage ratio by 10% during 2013, which is a success.”

Under Belgian regulations, assets must meet two funding tests applied to the same asset pool – minimum reserves and long-term reserves. The minimum reserve test is essentially a wind-up test, the immediate cost of winding up the scheme. KBC has 168% coverage on this test, equal to €723m of scheme assets. Under the long-term reserve test coverage is 128%, or €935m. The difference is that underfunding by the minimum reserve test must be made up by a cash injection from the relevant sponsor within a year.


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