As the chart below indicates, there has not been any major shift in the asset allocation policy of Belgium’s larger segregated pension funds during the last 10 years. This has now started to change.
Currently, such funds are invested about 50% in Belgian assets. A further 15% to 20% is invested in Euroland ex-Belgium. This gives a total of 65 to 70% invested in Euroland. Funds already invest in UK and Switzerland and the other major global stock markets.
There are no restrictions on the currency in which the funds invest, and whilst there is a minimum of 15% which has to be invested in Belgium government bonds, this has not proved restrictive in practice and is expected to be dropped soon.
The introduction of the euro seems likely to lead to a rapid drop in the allocation to Belgian assets. Most fund are unlikely to go as far as the VKG / CPM fund which is reported already to be reducing its domestic equity exposure from 18% to 4%, and to be adopting a 30% Eurozone bond allocation. Most funds expect Belgian assets to drop to below 25% of the fund quite quickly although this is then expected to stabilise. The increases are expected to be to Euroland assets with non-euro exposures remaining much as they are now.
Belgium will continue to have a more significant share of assets as funds will wish to overweight their exposure to the Belgian economy partly for liability reasons and partly for political reasons.
Even though the currency risk will be eliminated the country-factor will still be dominant for most stocks. There are also practical reasons for a higher Belgian weighting, in particular, the skills of the local investment managers favour Belgian investments. Whilst all managers have been preparing for the euro, those without links or joint ventures are likely to be at a disadvantage to international managers and, overall, local managers are likely to lose market share.
The largest pension funds are making increasing use of Asset-Liability modelling (ALM) to set their benchmarks. Most of these studies have been set on pre-Euroland assumptions but generally show more equity and international exposure than that of the average Belgian fund. More funds are likely to use ALM in the future and, provided Belgium inflation remains close to the ‘euro’ inflation, then this will continue the trend away from Belgium assets and into Euroland and International equities.
Paul de Smet is with Conac