Belgium learns lessons from neighbour

Belgian pension funds have a fairly balanced approach to asset allocation. They are more conservative than more developed markets such as the UK and the Netherlands, but have a greater weighting in equities than pension funds in many other European countries.

Figures from the Belgian Association of Pension Institutions (ABPI) show that as at end-2005 (the latest date at which information is available) equities were the largest asset class, making up 44.2% of the average portfolio. They just pipped bonds, which had a 41.6% share. A long way behind came real estate (7.5%), liquid assets (5.0%), and other assets (1.7%).

“Over the past three years, the average percentage of equities has not changed very much,” says Willy Santermans, principal, Mercer Human Resource Consulting in Brussels. “And I don’t see many funds making significant changes.”

Mercer’s own figures show that of the equity portion, one-third of total assets is invested in Europe, 10% in the US, and smaller percentages in Japan and global equity funds.

“Asset allocations haven’t changed much compared with 2005,” agrees Chris Desmet, senior investment consultant, Watson Wyatt in Belgium.

“However, the size of the pension fund has an effect on asset allocation. The biggest pension funds have an allocation policy which allows them to remain within their strategic benchmarks. They tend to have specialised mandates with several different managers. The smaller funds don’t have strategic benchmarks. Instead, they might have just one asset manager running a balanced mandate.” He says that there are also geographical differences between the large and the smaller funds.

“Bigger pension funds invest more on a global basis, while small ones focus on the eurozone,” he says. “However, the smaller ones are now starting to go global.”

In fact, the bigger pension funds are becoming more radical, according to Stéphane Detobel, general manager, business development, Benelux, Crédit Agricole Asset Management.

“In terms of asset allocation, they are looking at the Dutch market because of its sophistication and maturity,” he says. “One trend we have noticed with the larger funds is that they are starting to do the liability-driven investing themselves. They are trying to match their liabilities though large fixed income portfolios, then adding some boosters on top. They might, for instance, add equities, using passive funds to get beta, then adding completely different funds such as emerging markets or private equity funds, to achieve alpha. We’ve seen that in the Netherlands for a few years.”

And he says that some funds are quite aggressive in taking positions within an asset class. “For instance, one fund has recently sold all of its long-dated bonds and invested them in short-dated bonds, as the yield curve is flat,” he says. “That is quite a dramatic change.”

One example of an innovative approach comes from Integrale, a multi-employer pension fund, which decided to increase its allocation to equities at the beginning of 2005. The fund says this was because bond yields were low but there were good market prospects for equities.

The fund therefore upped its equity exposure from 10% to 15% of its €1bn portfolio by selling bonds. The operation was repeated later that year by further increasing the equity allocation to 20%, including convertible bonds.

Integrale says its asset allocation is dynamic, ie it can change its policy according to market circumstances. However, it does not expect to make radical changes during 2007, based on current assessments of the economy.

Geographically, Belgian pension funds are fairly adventurous in their asset allocation, according to the ABPI.

Although at end-2005, bond portfolios were overwhelmingly (92.1%) invested in the Euro-zone, the equity portfolios were much more wide-ranging, with only
54.3% in the Euro-zone.

“For our Belgian pension fund clients, we recommend 70% European equities, including the UK, and 30% international,” says Kristof Woutters, pension solutions expert, Dexia Asset Management in Brussels.

Equity allocations have also been affected by the regulatory framework, says Ludwig Caluwe, business development manager with CapitalatWork, an independent investment management company. “The minimal return requirement has introduced a focus on LDI,” he says.

“Some funds have been reducing equity exposure - especially those with allocations around 60% - or are implementing capital guarantee structures.”

But he notes that other funds have been going in the opposite direction.

“Given the fact that overall equity exposure has been relatively stable, this means that funds with lower than average equity exposures have been increasing their equity exposure,” he says.

There have also been subtle changes on the fixed income side of pension fund portfolios, according to Marc Leyder, chief operations officer, ABN AMRO Asset Management.

He says: “With bonds, we’ve noticed that investing in a passive way seems to make sense. We have some clients who don’t think it pays an investment manager to outperform the bond market because there are not very many ways to do it, so we’ve seen a couple of passive mandates.”

He also sees increased involvement with alternatives.

“Over the past two years, we’ve seen pension funds diversifying, so where they used to have just equities and bonds, the fall in the markets at the beginning of 2000 has led to people looking for alternatives, both in terms of investments and property,” he says.

Caluwe is slightly less bullish about these sectors.

“It is the larger funds which have a bigger appetite for the alternative asset classes, including real estate,” says Caluwe. “We definitely see an interest in alternative investments from other funds, but this hasn’t been translated into actual positions. Diminishing returns in this asset class will not encourage newcomers.”

“The time available for pension scheme board members to research and manage investments is too little for private equity,” says Desmet.

“And it is really only the bigger pension funds which have big enough reserves to make an allocation, and then only a few per cent. I don’t see things changing quickly. Pension funds don’t think about alternatives, as they perceive them to be expensive, and an esoteric, ‘black box’ concept.”

But he says that quoted real estate, on the other hand, is regarded as a core asset, making up between 5 and 15% of average portfolios.

“We have seen an increased allocation to real estate,” agrees Woutters. “I suppose it is because of the excellent performance, which has automatically increased the value of holdings, or because those funds which didn’t have it have bought it.”

Again, Integrale is at the forefront of real estate investing. It does not use mutual funds, but invests directly in building, sale and leaseback operations.

Over the next few years, one of the biggest features of the pensions landscape will be the new pensions law, and this will have a significant impact on asset allocations, according to Desmet.

“Pension funds will have to produce a statement of investment principles and review it every three years,” he says. “That means pension funds will be forced to look at their strategic asset allocation and justify what they are doing.”

And he says that another trend which is likely to affect asset allocation in the future is the Belgian Government’s plan to introduce pan-European pension schemes.

“In five years’ time, all large Belgian funds could be pan-European funds,” he says.

“That would have a big effect on asset allocation. In particular, if there is a change from paying lump sum benefits - which is what most Belgian schemes do - to making regular pension payments when members retire, the effects on asset allocation will be significant.”