The VKG pension fund in Belgium, established more than three decades ago, aims to create decent pensions for the country’s doctors, dentists and pharmacists. The fund is geared mainly towards independent professionals, because, it says, their first pillar state pension provision is very weak. VKG offers a service to its members which is not offered by any other Belgian pension scheme, and this is its ‘solidarity system insurance.’ This is financial cover that runs alongside the pension plan, and includes life insurance, disability insurance and long-term care insurance, all financed in a pooled system.
The most important change that the fund has had to deal with recently is adapting the pension plan to the new Belgian law on second pillar pensions, and the fund is still working on this. It involves legally prescribed guarantees and adapting the solidarity-based system of insured risks.
As a result of the governance reform two years ago, VKG now has several different committees, each with their own specific tasks and advisers, which report their solutions to the 14-strong board of administrators. These committees, which are made up of members of the board of administrators, representative members of the scheme and management, are the asset allocation committee, the risk committee, the audit committee and the strategic committee. It is the board of administrators that, ultimately, makes the decisions.
At the top of VKG’s management structure is the general assembly, which meets at least once a year and appoints the board of administrators. This board, in turn, appoints the four members of the executive committee who take care of the day-to-day management of the fund. These directors lead a staff of 28, across four groups – finance, front office, back office and commercial staff.
To be as efficient as possible, the fund says it uses specialised IT that is developed for and targeted to its needs. It aims to hold detailed information on members, not only on pensions and insurance but also on tax. Since it works with a targeted population – the medical sector – the fund says it takes great care to set up a complete customer relationship management (CRM) model specialised to the needs of the target group.
Communication with members is on an individual basis, with each member contacted by mail once a year and informed about their pension status. VKG also has a comprehensive web site, which states the fund’s investment ideology and corporate governance, allows members to do pension calculations and lets new members subscribe. There is a wealth of other information on the site too. On top of this, VKG often organises workshops to inform members about all kinds of subjects which might be useful to them professionally.
The fund uses a range of advisers. Watson Wyatt Actuaries, Belgium provides the actuarial services while Koen De Ryck at Pragma Consulting, Belgium, and Frans Ballendux at Mercer in the Netherlands provide investment services. On risk issues, the fund works with J D’Haene at the University of Leuven, and Deloitte & Touche are employed as VKG’s statutory auditors.
Asset liability modelling
VKG takes a three-pronged approach to asset liability modelling.
Firstly, it defines liabilities and their modelling into the future. Using the theory of commonotonicity – dependency of future outcomes on the rate of return – it then works out the level of funding in a value-at-risk type approach. This shows how much provision is needed.
Secondly, the fund models the options embedded in the guarantee rates, which reveals the price of the guarantees. Added to the discounted future cash flows, this, again, shows the level of pension provision needed to be able to pay future pensions.
Thirdly, the fund looks at asset allocation and the risk involved using a standard value-at-risk approach.
These three results have to be equivalent, and the fund tries to make sure there is a commonotonic match between assets and liabilities.
In general, 45% of assets are allocated to equity investments, 45% to bonds and 10% to property. The fund outsources its investment, using 10 managers, each of which manages a specific asset class, but strategic decisions are taken in house.
The 10 mandates are global large cap value, global large cap growth, emerging markets, mid-cap US, Japan and Europe, small-cap, government bonds, non-government bonds and property. On top of this, there is a currency overlay programme which actively manages the currency risk.
The fund’s in-house audit committee follows up on day-to-day practice by management and on internal procedures that are written and implemented by the financial controller. The fund is audited throughout the year – with reporting done once a year – and the audit is submitted to the Belgian Insurance Controlling Agency. Watson Wyatt does the annual actuarial evaluation.
Highlights and achievements
VKG says it operates in a very tough environment, with fierce competition from commercial insurance companies, a membership that is completely independent and legislation and accounting rules that are unfavourable. Given all of this, the fund has succeeded remarkably well in extending its market share – currently 40%. As well as this, it has increased and modernised its operations to the benefit of members, and developed and implemented state-of-the-art risk management tools.