Moving on to a wider stage

The word on the street in Brussels is that the Belgacom pensions fund is about to outsource another tranche of its portfolio. If this happens, even more fund managers will be lured to the honeypot than last time, when over 60 applied, since six of the eight candidates sharing the $1.6bn of mandates were non-Belgian.

The outsourcing was done in the full glare of EU contract rules. The outcome may have been testimony to their effectiveness, but it ruffled feathers locally. The results certainly shocked a few and opened some eyes,” says one well-placed observer of the impact on the indigenous marketplace, which is dominated by the major banks.

Others play down the reverberations of the outsiders’ success. A medium-sized investment house shrugs it off: “No - we were not surprised.” Another observes dryly that it was surprising Belgian companies obtained any mandates at all, given the international outlook of the pensions fund.

But care has to be taken when assessing the impact on the investment marketplace. “Belgacom is a special case,” Karl Goosens of consultants Coopers & Lybrand ABC Services in Brussels points out. “It is in a category of its own, so it can take a different approach.”

Nonetheless, the climate in which all pension schemes operate has been affected. “Funds are more aware of the issues and thinking more about what they are doing as a result,” says Paul De Smet at major consultants Conac. And the profile of non-domestic managers has been raised. According to Willi Santermans at Mercer Henrijean: “Belgacom set an example - there is something outside - why not give it a try?”

But outside managers looking to penetrate the market face many of the same problems as their local counterparts - and a few more besides.

It is a small market. Total funded pension scheme assets are just a small proportion of thoseof its Dutch neighbour. There are perhaps no more than a dozen funds with over $100m in assets. They are also up against a generous state system, with even lower-paid workers having a 60% first pillar pension. Changes are in the pipeline due to the Colla law, but these will take time to have a significant impact.

Though multinationals have long been active in Belgium, it is largely a country of small to medium-sized business and the insurance industry has grabbed a large proportion of the pensions marketplace, albeit at the smaller end. The Belgian banks and other investment managers are keen to loosen this grip, believing that it is economic for companies to go self-administered with just Bfr200m ($6.2m) in pensions assets. Banque Degroof director Alain Saiens dismisses insurance companies’ guaranteed rate of return: “They take 100 francs, invest 85 and give a fixed return of 4.75%, plus a participation. Insurances’ traditional way of giving a return is illusory.”

A more immediate barrier to new schemes and improvements to existing ones has been the limit on increases in pay and benefits to bring the country in line with the Maastricht criteria. But the major banks see these as a temporary delay on the way to more corporate pension provision. “We are looking forward to new money flowing in and to having more space to manoeuvre,” says fund manager Johan De Ryck at Kredietbank, following the easing in the restrictions announced for this year.

The pension funds of Belgium’s resident multinationals have been more adventurous on the investment side than local employers, says investment consultant Brian Hill of Watson Wyatt in Brussels. These funds used the opportunity of new pension investment regulations in the mid-80s to invest more widely, even though the rules were not specific. Most local employers held back until matters were clarified years later. The typical multinational scheme has an asset allocation of around 50% in equities, compared to an average for all funds of 35%.

Xavier Timmermans of Generale Bank Asset Management says the group started in pensions in 1976, mainly for multinationals’ Belgian schemes. He agrees they are more sophisticated than many local companies, but they too may have been affected by Belgian conservatism. He explains that where scheme members contribute, the personnel are represented on the board. “Even if investment horizons are very long, a more conservative portfolio structure is chosen to avoid having to_report volatile returns.” Union representatives’ conservatism could also extend to their funds using foreign managers.

One barrier that may be insurmountable for some foreign groups wanting to offer services is the move over the past few years for pension funds to invest through investment funds, known as BEVEKS which capitalise income and thus get favourable tax treatment. Our table shows the importance of this. The major banks have been selling these agressively and many medium-sized schemes have gone this route, says Conac’s De Smet. “If you look at schemes’ assets, you can find anything from 50 to 100% of the total assets are invested through a limited number of these funds.”

Koen De Ryck of Pragma Consulting in Brussels points to the fact that use of these vehicles is tax-driven and that if the regime was to change, funds would find them a relatively expensive way of holding assets. “Around 90% of pensions funds are on defined benefits basis and not defined contribution, where such funds are normally used.” He believes that BEVEKS should be used for specific purposes within pension funds, such as “small cap investment”.

With investment management fees a matter of a few basis points, the major banks may feel they have the marketplace tightly stitched up. As Generale Bank’s Timmermans says: “We are used to tough competition among the main banks and specialised asset managers. One of the results is that asset management fees are quite low compared to what Anglo Saxon managers charge. This protects our marketplace.”

De Smet is not so sure. He points to Belgacom’s move to splitcustodianship from management. “Up to now pension funds in Belgium have not really done that but I think they will start thinking about it.” And that will lead clients to open up the whole area of global costs with their banks. “Clients are only informed of the management fee and are just aware of some other costs, but so far no one has gone so far as to reveal the real global costings.” He believes Belgacom will be a starting point for this.

Watson Wyatt’s Hill agrees that a 20-basis-point management fee might look good, but it excludes transaction fees through the banks’ brokers and the commissions payable. “Twenty basis points easily becomes nearer 100.”

“We get the fees we expect to get,” says Pauline Stuart of Morgan Grenfell, one non-domestic manager which has picked up a number of Belgian clients. She believes fees depend on what is being delivered to clients.

If fee levels are not likely to impose a problem for outsiders, another market feature that may help them get more of a toehold is the relatively high proportion of funds that are internally managed. Hill estimates that a third of the larger funds by number and half by value are still so managed. This does not mean they are virgins waiting to be approached. At the big Electrabel scheme, the question of outsourcing has been looked at and rejected, says a spokesperson.

The bulk of Belgian mandates are for balanced portfolios, which not infrequently are split between two local managers, one of which might have a reputation in a specialised area or traditionally have a higher exposure to equities. Morgan Grenfell says it does both balanced and specialist. Simon Hogarth of Gartmore in London says: “We have done well in Belgium getting both specialist and general mandates.”

In Kredietbank’s view the market is still very much towards balanced portfolios. “Any change to specialised mandates will take time,” says Johan De Ryck. But the smaller Brussels-based investment houses, such as Petercam and Puilaetco, say the trend is towards specialised investment. Peter Deknopper at Puilaetco, which specialises in Dutch and Belgian equities, sees its domestic pensions business growing as the bigger funds diversify.

Non-domestic managers are likely to find the best opportunities in the moves to specialised investment. With up to 60% of pension equity portfolios traditionally in overseas equities, Belgians do not need convincing of the case for international exposure.

The arrival of performance measurement, as provided by the Mercer Henrijean service, is making the market “quite transparent,” Deknopper says. “We see the market really changing if investment managers produce good results.”

According to Santermans at Mercer Henrijean the service now covers around 80 funds with some Bfr125bn ($11.7bn) in assets, which demonstrates the increasing interest in performances. As a separate excercise, the firm is also asked to advise on the selection of managers, particularly specialist ones. “On average, we find that the foreign managers out perform Belgian when it comes to foreign equities.” But he stresses the figures are an average. “But you do not find that Belgian managers are so good in this area.” But the Belgian managers are not going to roll over and concede their market place.

At Petercam, Leopold Doultremont says: “We are not worried by foreign competition. Each year, we see our pension business growing by 30 to 40%.”

For Generale Bank the drive is to be a player on the wider stage. “If we want to grow our asset management business, we have to have the same standards as the best managers internationally, and certainly reach those of the Anglo Saxon managers,” says Timmermans.

And what better way for Belgian managers to prove their international credentials than by winning a bigger share of the mandates in the next Belgacom tender, whenever it happens?