For Georges Van Acker, senior human resources adviser at the e23m Belgian pension fund of pharmaceutical group, Merck & Co Inc, the guiding philosophy has always been that being a small pension fund is not an excuse for not being professional.
“There are about 550 families whose future depends on what we are doing with the pension fund here and that reminds us of the importance of our work!”
To this end, in 1998, the fund began a comprehensive review of its benefits and investment arrangements, aiming to secure what Van Acker calls “the best possible benefits at the best possible value” for the company and its workforce.
The first major reform, he says, was to ensure benefit design reflected both choice and responsibility for the employee, as well as representing a management tool for the employer aligned with the company’s values of ‘responsibility and commitment’.
The second was to ensure a return on investment to satisfy management that the cost involved in providing good quality benefits and pensions was justified.
In terms of scheme design, the review ended with retention of a basic defined benefit (DB) fund alongside an additional, ingenious defined contribution (DC) plan where employer-only contributions are linked to employee performance: “I don’t like the debate of DB versus DC,” says Van Acker.
“My philosophy has always been to draw the best from these two worlds. Why should I throw away a nice tool like DB if there is no reason from a financial point of view to do so? Saying that though, the DB plan did not fit with all of the company’s objectives so we created the top-up DC plan on the basis of the so-called ‘cafeteria’ or flex plan – indeed we were the first to do this in Belgium.”
The cafeteria plan allows employees to opt in to pensions, disability coverage or additional life insurance.
Van Acker explains that Merck Belgium’s DB plan covers a generous 70% of the pensionable base after 35 years of membership, with company contributions representing 5%, while employees pay 1% up to the social security ceiling and 4% above that.
Regarding the DB plan investment, Van Acker notes that the review saw the fund shift from a ‘typical’ balanced arrangement to a core/satellite ap-proach: “We used to do the pension fund thing where you go to an asset manager and say: “I’ve got a pension fund can you do something for me?”, and then the asset manager says: “Yes, I can do whatever you want!”, whereas in fact you ended up doing everything they want and then paying for it!
“We moved from one to two balanced managers, but it was still the same old story, so I recommended to the board that we had to stop this cycle and assume full responsibility for strategic asset allocation. “This was a big revolution and it was a situation the board was not particularly comfortable with at first because they were used to outsourcing the financial management and leaving it at that.”
Together, Van Acker and the board put together a set of investment objectives and sought a management system to implement, monitor and evaluate the process.
The first step, he explains, was to stipulate a benchmark, which meant testing the ‘comfort zone’ of the board. The fund decided on a move from a balanced to a passive core/active satellite approach, using Pragma Consultants in Brussels as a manager screen, and appointed BGI to handle the indexation (50% of the fund) and KBC, Puilaetco, and Capital International to run a variety of active equity briefs.
“One reason why we had such a core passive set-up was that you can’t make big complex shifts overnight.” With a scheme-specific benchmark in place, the board then agreed on an outperformance target of 1% per annum via implementation of the new set-up.
“This was their added value as a board and that’s hard work!
“Now five years later we see the results, because we have achieved the 1% outperformance every year with about 3% tracking error, so an information ratio of around 0.33.
“The only thing we had to change in the meantime was the Puilaetco mandate because it was Benelux oriented. We dropped it with the shift to the euro for a European equities mandate through HSBC.
“We also ran an ALM study in the meantime, which we do every three years, but nothing changed from our overall allocation of 70% equities/ 30% bonds. There’s also no reason to review the strategic allocation now because if we do we will take a loss, especially since we are not forced to change anything by our funding ratio which is comfortably over 100%.”
Van Acker, along with the president of the board, also has the possibility of employing tactical asset allocation (TAA) – within clear guidelines – to generate relative or absolute performance where possible.
“We never drop below the 60% equity exposure level, but as an example, in recent months we bought equities in the US and Asia Pacific, and in April we took a 7% return, which mitigated losses of 7% in the first quarter.
“Our outperformance each year comes from a combination of selection and TAA, and it is very satisfying for the board to be able to see this work.”
Merck’s DC portion covers variable salary, which Van Acker believes is important as it decouples the pension somewhat from a more risky link to base salary only.
The fund communicates all its workings via a web site that employees can access at any time.
On top of that, Van Acker is wholly available for individual meetings with employees to give benefits and pensions advice on four days a year.
“The DC cafeteria plan is complimentary to the DB fund, so at the time when employees are making decisions I’m available for financial planning advice. All members are also allowed to attend the annual meeting of the pension fund.”

The DC plan offers the possibility for an employee to invest between zero and 70% in equities, either through three model portfolios (70/30% equity/bond fund, 60% bonds/40% equities fund or a full bond portfolio) or through their own asset mix.
Down the line, Van Acker says the fund will likely bring down the 70% equity top level to 50%, while the pure bond portfolio may be diversified to lower the risk profile.
Under the new Vandenbroucke law the fund also has to guarantee 3.25% annual return on assets, although Van Acker says the tariff is much less problematic than living with the legislative uncertainty prior to the law.
While Van Acker concedes that given it’s small size, the scheme has to be realistic that it can’t put in place everything it wants to due to cost exposure and, management feasibility, he is proud that this professional vision is today shared by the board.
“They feel proud of what they have achieved. A mental shift has taken place, and when both the board and the employees see how clear our processes are and the methodology involved, it is easier to accept the outcome.”