The beginning of reform
The Belgian government has taken a step forward in the development of the country’s pension fund system, with a proposed new law aiming to promote the consolidation of the second pillar.
The new law, subject to review, will probably come into force at the end of the year. It will have a major impact on the pension fund industry as a whole, bringing more complexity to the market while promoting the creation of sector schemes to fill the current gap in retirement cover.
The pension fund industry, whichhas long awaited this development, has welcomed the government’s efforts to develop the second pillar, but certain aspects of the new regulation are seen as unclear and in some cases confusing.
Karel Stroobants, president of the executive committee of VGK – the pension fund for doctors, dentists and pharmacists – and president of the Belgium pension fund association, feels positive about the new situation: “This new law is a very good thing and we can now say that finally something has been done. They have provided a solution for the second pillar in Belgium and also pushed the introduction of sector pension funds. But they have gone a little too far in terms of regulation. It’s a bit too complicated.”
The Vandenbrouke law – as it is known within the industry, after its main promoter, the Belgian minister of social affairs and pensions – will definitively affect the institutional asset management business although it’s early days to say to what extent things will change.
“The new law will promote the participation ratio in the second pillar, and this is very important because today only one worker in the private sector out of three enjoys a second pillar pension,” says Yves van Langenhove, executive director for institutional business at Fortis Investment Management in Brussels. “However there is a lot of confusion surrounding this initiative,” he says. Van Langenhove explains the new law will require a minimum return rate for pension funds and that the way this is going to work is still not clear. “If we are talking about a minimum return that has to be obtained at the end of a career, and you have an investment horizon of 10 or 20 years, then there is no problem,” he says. “In this case I would certainly agree with the social need for requiring a minimum return, because you can do it in a way that does not affect your investment strategy.” But if this minimum return has to be guaranteed for each calendar year, pension fund sponsors could be force to take a more conservative and static approach to investment.
“As far as I am aware the aim is that this minimum return should be guaranteed on a longer period and this is fine. But the question now is how this is going to be organised and this is something which today is still unclear,” he says.
He adds: “I think the key issue of this new situation is going to be the practical organisation and the definition of that guaranteed minimum return.” It has to be a system in equilibrium where you guarantee a minimum return but also can use any returns in excess to finance the years when that rate is not achieved.”
Another aspect of the new regulation is that a special vehicle, exclusive for pension funds will be created. Since 1986 pension funds in Belgium could be set up under two different legal entities, an ASBL (association sans but lucratif) or AAM (association d’assurance mutuelle). Under the new law a separate entity will be established allowing the development of a special legal and fiscal framework exclusive for pension funds with the consequent impact on taxes. “ASBLs, for instance, were never designed for pension funds and although the new fiscal treatment has not yet been defined, the government will work on it in the next few months,” says Johan de Ryck, manager of institutional asset management and investments at KBC in Brussels. De Ryck also welcomes the new law as a way of seeing the second pillar grow. “It’s not the end but it’s certainly the beginning,” he says. “As such the new legal framework will combine both the social aspects, almost touching every person, and the capitalisation of the second pillar through money reserves.”
KBC, which last year won every single pensions mandate coming to the market either on its own or with other managers, is trying to establish a brand name as manager of sector funds, not only by winning mandates but also by organising seminars and conferences on this topic. “We are getting fully prepared for managing the sector funds that will be created in the next few years,” de Ryck says. “We are usually in the forefront when there is a law change and we are looking very closely to what is happening now. We are already managers for the first sector fund of the new generation, the pension fund of the metal workers, that was set up only a few months ago, so we already have good references.”
How long it will take for the
Belgian industry-wide pension funds to really take off, no one knows, but looking at how this area has developed in the Netherlands, where 85% of second pillar reserves are sector reserves , the expectations are high.
“Hopefully one day we’ll reach the same level as a proportion of GNP as in the Netherlands, but it will take time,” says de Ryck. “However, Belgian asset managers are aware of the possibilities ahead and will be closely following any developments in the market.”
This expected growth of the institutional asset management business in Belgium will attract more foreign managers into the market, although, according to some local players, their possibilities of gaining market-share, will be limited. “In the long term the new sector funds will become bigger in volume, making this market very interesting for foreign players,” de Ryck says. “But because they will be organised at a sector level, the unions will play a very important role and as such different selection parameters will be used. This added to the fact that in the beginning the size of these plans will be very small, will make winning mandates very difficult for managers from abroad.”
However, the rapid professionalisation of the market as a whole and the need for more specialist managers is already increasing the opportunities for foreign firms. Investment process is now one of the main criteria when it comes to choosing a manager, thus benefiting foreign houses with global expertise. Nevertheless, good service is also crucial for selection and here local players still have a lot to offer. The key for success would then be combining both the best investment resources and the most efficient service for clients.
“In order to succeed in this market you need to show a strong commitment,” says Benôit Fally, deputy managing director at State Street Global Advisors (SSgA) in Brussels. “You have to show your clients that you are here to stay and that’s what we have been doing for the last 10 years.”
He adds: “We have the experience in managing pension funds assets and we’ve been doing so in the Netherlands for 15 years. The investment solutions are already there and implementing them in Belgium as the market grows won’t be that difficult.”
But although the industry is concentrating on what the future will bring, for already established pension funds these are also interesting times. After years of very good returns (see table page 30), preliminary figures recently made public by the BAPF show a flat rate of return for 2000. This preliminary survey was based on responses from 19 pension funds accounting for Bfr230bn (e5.7bn). Taking into account that the performance of the sector in 1999 was 15%, these poor results could drive pension fund sponsors to rethink their investment strategies, although so far the general reaction hasn’t been very negative.
“Pension funds in Belgium are now much more professional,” says Johan Heymans, partner and managing consultant at Watson Wyatt in Brussels. “More and more pension funds have statements of investment principles including investment regulations and individual benchmarks. Considering this, having zero or negative returns is not really a problem because they understand better how financial markets work, they know how to control risks and view investment on the long term.” He adds: “Of course, investors don’t like negative returns, but as long as these are within the risk profiles they won’t think about changing their investment philosophy.”
Van Lagenhove at Fortis comments: “We knew that the situation we had during the last few years of very high returns was not going to last for ever and 2000 was the year that things changed for Belgium investors.” He adds: “ We haven’t had problems with the fact that nominal returns were close to zero, because our clients are now more sophisticated and know that markets evolve and that they have to take risks. We definitively don’t expect to see more conservative strategies as a result of last year’s returns.”
The question now is what will happen in the future. “I do think returns will make people rethink their approach to investments, maybe not now, but definitely in the future,” says Stroobants. “The results of 2000 will increase the use of asset liability studies and will place more importance on costs. With 15% returns, management fees are not such a big issue, but when we are talking about zero performance everything changes.”
This approach will also mean business growth for investment consultants. “Larger pension funds are now starting to realise that they can’t do everything themselves,” says Heymans. “We haven’t reached the Anglo-Saxon level, but pensions funds are more and more using our services and the new law will increment demand even further.”
Consultants are also playing an important role when it comes to introducing new investment solutions in institutional portfolios promoting discussions on alternative strategies. However, in terms of asset allocation pension funds portfolios in Belgium have not experienced many changes during the last year. “Compared to the rest of Europe, pension funds in Belgium have always been quite aggressive,” says Erik van Beylen, head of institutional clients at Cordius Asset Management in Brussels. “The percentage of equities in institutional portfolios is around 55% and I think it will stay like this for some time.” Despite this strong equity weighting, alternative investments seem to be still far from pension fund boards’ investment strategies. “There is a lot of discussion about introducing alternative investments, like private equity,
in the portfolios and our clients
come to us asking questions,” van Beylen says.
“But in practice, Belgian pension funds are not investing in alternatives and I don’t think this will change in the near future.”
Some believe that this attitude should changed in order to improve performance.
“For us introducing alternative investments in institutional portfolios is the best way to achieve better returns,” says SSgA’s Fally. “But so far we haven’t seen a lot of interest in this products.
“We are trying to convince people that this is the right time to move,” Fally adds. “We are proposing a core-satellite approach and we believe the core should be passive and then on top other satellite strategies to add value to portfolios. We are using these strategies in the US and in the Dutch market and we believe we are in a good position to educate Belgian pension funds about different investment philosophies.”
In terms of fixed income investment, corporate bonds are sneaking into pension funds portfolios, although the proportions are still small. “We certainly see more and more demand for corporate bond products,” says van Beylen. “But the interest towards high yield bonds is still very limited.”
Another trend which is developing fast and without a doubt will have an important impact in the Belgian institutional asset management arena is everything to do with socially responsible investment (SRI). “SRI is definitely coming,” says van Lagenhove.
“A lot of clients come to us with questions about this products and we are now developing a SRI policy to satisfy that demand. Our minister of social affairs recently declared that he will ask pension funds to state in their annual report their approach to SRI, as already happens in the UK and this will increase the interest in this field.”
Van Beylen at Cordius agrees. “There are more and more SRI funds in the market but in terms of pension funds these products will be introduced gradually.”
The coming months will be very busy for asset managers, pension funds, consultants and everyone involved in the industry. “In the next few months pension funds, actuaries and insurance companies will have to join forces to review the law and brief the parliament about all the changes or corrections that should be made,” says Stroobants.
It will also be interesting to see how the new law and its minimum return requirement will affect defined contribution (DC) in Belgium.
“It is unclear if minimum return requirement will be also applicable for DC plans,” says van Langenhove at Fortis. “The rumours today are that it will be applicable to any pension vehicle, and in my opinion that would mean the death of pure DC schemes in Belgium.” He adds: “Why should employers take such a risk and give investment choice if on the other hand they have to guarantee minimum returns? Investment freedom and minimum returns are not compatible and in this case Belgium will not move in line with what is happening in other countries. But everything is confusing at the moment and the only thing we can do is to wait and see what happens and to get prepared for the possible outcome.”
Further reforms will be needed in the future, but in general asset managers are happy with what the government has done so far. “We are happy with what we have got now,” says KBC’s de Ryck. “It took them years to come to this point and I don’t think we should put more pressure on them for the time being. More changes will be needed soon but everything will come.”