For the second year in a row, investment returns have disappointed Belgian pension funds. After many years of very good investment performance, the zero return registered in 2000 and the negative returns of 2001 have worried institutional investors in Belgium, although the outlook for the near future is more optimistic.
Compared to other countries on the continent, Belgian pension funds’ exposure to equities has been higher than the average, accounting for more than 50% of total assets. For this reason the poor performance that we have seen in the equity markets for the past 20 months or so has affected Belgian investors to a higher degree than some of their European counterparts.
The small size of the domestic equity markets has forced investors to invest more abroad, mainly in the Euro-zone; now less than 5% of total assets is invested in Belgian equities. Also the small size of the average Belgian pension fund has encouraged the use of mutual funds in their investment strategies, with around 70% of total institutional assets being invested this way.
This, however, is nothing new. Belgian pension funds have been looking abroad and using investment funds for quite some time, but it is the bad investment returns that are bringing changes to the marketplace, forcing investors to analyse their investment strategies thoroughly, with the focus on their own long-term liabilities.
Another factor that is changing market practices is the new regulation on pension funds, the Vandenbroucke law, which could become finally into force in January 2003.
“The discussion and debate about this law was one of the major topics within the industry during last year,” says Jan Longeval, senior manager and head of institutional portfolio management at Bank Degroof in Brussels. “The new law requires a minimum return guarantee for defined contribution (DC) plans that will put employers in a difficult situation.”
Certainly the new law will have a significant impact on the investment strategies of all DC schemes, which will be forced to guarantee a minimum return of 3.25% per annum on average for the full term of contributions. “In the current market conditions achieving this minimum return is not an easy task,” says Paul de Smet, partner at consultancy firm Conac in Brussels. “Managers are looking at the range of products they can offer to meet this requirement. Employers will want products that could limit risks and even though DC schemes are designed to give members investment choice this would be also limited. Sponsors won’t be able to offer employees full choice of investment options because they will have the pressure of having to achieve a guaranteed minimum return.”
He continues: “There is a lot of confusion in the market because DC plans always put the pressure on employees and now this legislation is reintroducing the responsibility of the employers to achieve a minimum return.”
And although it is true that employers will ask fund managers for solutions to their problems, the risk and pressure will remain with them. “The new law is going to affect employers more than investment managers,” says Francis Heymans, director of sales and marketing for institutional asset management at Petercam in Brussels. Petercam manages around e3.5bn for Belgian institutional investors.“We are not the ones that are taking the risk. Of course, they can choose investment products with a capital guarantee but these involve a cost. What we recommend to investors is to put some money aside and manage this capital by investing in equities and bonds. In the long run they will always be winners.”
Heymans adds: “In my opinion it is all about financial engineering and there are many different ways to find a solution to this minimum return requirement.”

Whatever solution employers opt for, the new regulation will have clear implications for investment strategies. “The asset mix of pension funds will be affected by the new law,” says Paul Beller, head of institutional business development at KBC Asset Management in Brussels, which manages institutional assets of around e13bn in Belgium. “On average, I believe that the equity proportion in pension fund portfolios, today around 50% of total assets, will be reduced,” he says.
The next few months will reveal more about the direction that Belgium’s second pillar takes, but many believe that its development will be slower than expected, even though the potential for growth does definitely exist.
This forecast growth is consequently making competition among asset managers tougher and international houses are experienced business growth. Institutional investors in Belgium have been open to foreign managers for a long time, not only to those coming from neighbouring countries like the Netherlands or France, but also to US and British managers keen to offer their expertise in international equity management. Although most local managers agree on the fact that more and more foreign names are selected to manage Belgium pension fund assets, only a few see their presence as a threat. “Large pension funds in Belgium can obviously afford to look outside and they have been doing it for some time now,” says Petercam’s Heymans. “I think competition and openness are good for the development of the market and I see this more as an opportunity for us to learn and share different views on investment strategy than as a threat for our business,” he says.
“It is true that when it comes to the smaller funds, domestic players like ourselves can offer more added value and this is the type of mandates we are focusing on,” he says. Heymans explains that the firm’s focus is mandates worth between e10m and e50m. “We are closer to this segment of the market, and international managers go for the big mandates anyway,” he says.
At INVESCO, the international firm that opened its Brussels office in 2000, head of investment Yves van Langenhove comments: “I think there is still a bias among pension funds towards hiring domestic players but this is rapidly changing as the market gets more sophisticated. At the end of the day investors are looking for the best products in the market and they are not that bothered about who is offering them.” INVESCO manages around e400m for Belgian institutions and believes its range of specialist investment products is definitely finding its place in the market.
“We have a wide range of products and it’s for our local team to decide if any of them suit the investment requirements of the local institutions,” Van Langenhove says. “Pension funds are going more and more for specialised products investing in US equities or corporate bonds for instance.” He continues: “Regarding bonds, we have seen a lot of interest in diversifying this part of the portfolio because although investing in pure government bonds is a very low risk option, the returns in this asset classes have also been very low. So corporate bonds and high yield products are becoming very popular especially among the larger pension funds.”
The use of specialised products is more and more being introduced as part of core-satellite strategies in institutional portfolios that are also becoming more common among investors. Although the core can be passively managed there is and increasing interest in using enhanced strategies for these part of the portfolio.
“Enhanced strategies are becoming very popular although it is still early days,” says Benoît Fally, deputy managing director at State Street Global Advisors in Brussels. The enhanced structure allows investors to invest with a tracking error of 100 basis points to achieve a performance of 1%. “An extra return of 1% becomes very important when the return of the equity allocation of pension funds is not that high, hence these strategies are now very attractive to investors,” he said. “We have worldwide experience in enhanced strategies and we definitely see this as an area where we can we offer a lot for Belgian pension funds.”
“Looking at recent investment returns investors are concerned about the way some active managers have been performing and they are looking into a combination of passive and enhanced as a way to improve their performance.”
Consultants are also playing an important role in introducing new strategies in the market and helping investors to chose managers. In the investment consulting arena houses such as Conac, Buck Heissmann, William M Mercer or Watson Wyatt have been actively performing manager searches for Belgian pension funds, even though the size of the market is conditioning the number of requests for this kind of service from clients. “Only the larger pension funds are requesting this type of service and there are only a few consultants offering this,” says Conac’s de Smet. “The market is small so I would say there are no more than five or six manager searches per year. At present there are around 270 pension funds in Belgium and this number is increasing but most of them are small funds using a single manager and investing through investment funds.”
And indeed the main clients for consultants continue to be the big pension funds.
“Consultants have a lot of work to be done with the large pension funds in Belgium,” says Petercam’s Heymans. “It is true they sometimes help us to do our work better and make the market more professional but sometimes they are a bit narrow-minded. Consultants tell all their clients about how important is to have a specific benchmark and I believe that sometimes it is better for the clients to manage their funds without a benchmark. Also I think sometimes they are afraid of proposing local smaller managers for the larger mandates and in this respect they are should be more open to different managers.”
He adds: “More and more they are introducing to clients the benefits of passive management and indexation and sometimes forget that there are small active managers that can add a lot of consistency to a portfolio.”
Consultants are also the ones telling clients about the potential that absolute returns products can bring to the investment portfolio, especially in the current volatile markets. In this area, hedge funds seem like one of the best options to achieve those absolute returns, although when it comes to actually investing in these products only very few investors have exposure to hedge funds.
“It is true that some funds are having some exposure to hedge funds but we are talking about very few funds and very low exposure,” says Degroof’s Longeval. “Regarding other alternative classes I haven’t seen much interest in private equity, although we’ll probably see more in the near future.”
At INVESCO, Van Langenhove says: “If you compare the evolution of alternative asset classes in the Netherlands and Belgium, you would clearly see that Belgian investors are taking much longer to open up their portfolios to this new asset classes. Sometimes you see some big funds with a small proportion of assets invested this way, but they are a minority. But it will definitely be an interesting area for the future.”
But at present, pension funds in Belgium are more concerned about their funds’ liabilities and how to get the most from their managers, than in experimenting with new asset classes. The poor investment returns have forced reviews of investment strategies and some expect changes in managers during the months to come.
“This is the second year with bad returns for the pension fund industry and investors are changing their attitude,” says KBC’s Beller. “After the first year with bad results investors remained calm but now they are starting to seriously think about the strategy they should follow for the future. Because some managers have performed worse than others I do think we will see some changes regarding who is managing what, and I believe this could benefit us because we have performed acceptably compared to other asset managers.”
However, for some the strategy for the future is not based on changing managers but in closely monitoring what their managers are doing. This is the approach followed by the e560m VKG-CPM fund for doctors, dentists and pharmacists.
“For us the management of our managers is our main priority for the future,” says Karel Stroobants, adviser to the board of VKG in Brussels. “We believe we can improve their performance by monitoring them closely and this is what we are intending to do.” For Stroobants radical changes in investment strategies or investment managers is not the solution to underperformance and more. “It is a bit like doing something after having looked into a crystal ball,” he says. “We cannot predict the future and I think these changes can be very dangerous. My opinion is that if you have decided on an investment strategy depending on your liabilities you shouldn’t change this strategy for as long as your liabilities are the same.” For Stroobants the only trigger for funds to make a fundamental change in asset allocation is when the market value of their assets goes below the value for which they can buy a zero government bond with the same duration and cash flow as their liabilities.
“I believe that management of managers is the way forward and even though we are not satisfied with the investment returns we are not planning to changes any managers in the near future. We are going to follow them closely to see if what they are doing is what they should do and currently this is our main focus.”
Keeping an eye on the managers will definitely be one of the main tasks for pension funds in the next few months. On the other hand, managers will concentrate on being able to respond to plan sponsors’ scrutiny and getting themselves ready for the changes that the new regulation will bring into the market early next year.
But there are some changes that are already up and running. In its aim to promote the development of the second pillar, the new legislation also contemplates the creation of sector funds, that could changes the Belgian pension landscape dramatically.
“One of the most important things we have seen during 2001 is the creation of sector pension agreements,” says Paul Roels, secretary general at Integrale in Brussels. “And this is a very important development and it is no longer an idea, it is a fact.” Integrale is a multi-employer pension fund that operates under the legal structure of an insurance company managed by employers and employers. It covers around 32,000 employees and has assets of e800m. “there is a lot of discussion at the moment about the new sector funds and how they are going to be managed.”
If Belgium is to follow in the footsteps of its Dutch neighbour, which has managed to establish strong and successfully managed sector funds, the potential of new assets could be huge. But, although there are already good examples in the market like Belgium’s first sector-wide pension fund, the e2bn Agoria – formerly Fabrimetal – for employees in metal related industries, some believe that the take-off of the sector plans will be much slower than expected.
“The creation of sector funds won’t be the boom that the minister of social affairs expects,” says Conac’s de Smet. “There are many aspects in the legislation that will slow down the whole process and I don’t think we’ll see a large flow of assets into this area.”
However, in general, the possibility of creating pension funds has been welcome by all the segments in the industry and especially by the unions which not long ago declined to enter into any discussion regarding the development of the second pillar and were almost exclusively interested in issues regarding the first pillar.
With the unions on board it is now for employers to adapt to the new environment. The new legislation does make things especially complicated for plan sponsors but only their determination and willingness to contribute to the future of the second pillar can make this new era in retirement provision in Belgium succeed.