The European pensions nexus


Belgium has become an important link for cross-border pensions, and yet it has been slow on the uptake of defined contribution, as Giovanni Legorano reports

Despite the revolution caused by the financial crisis, Belgium has continued to harbour dreams of becoming Europe’s cross-border pension hub.

Belgium is often referred to as a country of subsidiaries due to the fact it hosts an overwhelming majority of foreign companies compared to home grown concerns. As a result, Belgium has tried in recent years to position itself as the most favourable centre for a centralised pension fund for multinational companies. 

It is important to note Belgium aims to be seen as not only the most favourable home for a centralised pension fund, but the natural home as it looks to emulate what it did with the European institutions. Belgian industry figures point at encouraging signals on this front.

Belgium is also attractive because of taxation. Typically Belgian pension funds do not pay any tax on investments

Hewitt practice leader Thierry Verkest told Global Pensions requests on cross-border or pan-European pensions have been taking up an increasing amount of his time. He said: “For the past few years you can pull all the different arrangements you have in different countries into one entity. Why would you work with so many different providers? Why should you deal with many different regulators? You can put all your pension’s asset and liability risk in one place We have a lot of questions coming from insurance organisations trying to set up such arrangements.”

The Institutions for Occupational Retirement Provisions (IORP) European directive, adopted in 2003, was transposed into Belgian law shortly afterwards. This resulted in the creation of a specific pension vehicle – the Organisme de Financement de Pension / Organisme voor de Financiering van Pensioenen (OFP) – which reflects the requirements of the IORP directive.

The OFP is a flexible legal structure in Belgium for the pooling of pension funds from different countries and so makes Belgium a particularly attractive country for those looking to set up a cross-border arrangement, according to Verkest.

He said: “Belgium is also attractive because of taxation. Typically Belgian pension funds do not pay any tax on investments. Plus it has a lot of double taxation treaties with other countries on investment income for example.”

He added: “If multinationals look at Belgium it is essentially because of the flexibility that we have in terms of investment, funding process and governance. The legal framework is so flexible that companies can actually organise their pension fund the way that best suits them much more than in other countries. And this is what companies like: having control, having flexibility.”

Watson Wyatt consultant Sven Schroven agreed. He said: “One of the advantages that has been promoted and that attracted a lot of interest was the minimum funding level for Belgian pension funds which appeared to be much lower than in other countries, particularly the Netherlands which has a much more stringent legislation in terms of minimum funding.”

Schroven explained in Belgium the minimum funding level has to be set at a “prudent” level. The principle is that the pension funds set their own minimum funding level on the base of the advice of an appointed actuary. This is then shared with the authorities who will decide whether it is prudent or not. If it is not, then the pension funds enter into negotiations with the authorities.

Although there is complete agreement among experts that the regulatory framework is particularly favourable, so far the cases of companies who have actually pooled their pension fund in Belgium are very limited.

Lane Clark & Peacock senior manager Dimitri de Marneffe said there were only three or four companies that set up pension funds operating cross border activities from Belgium, together with activites on the national market. Other industry figures pointed out the process was still pretty complex and that there were several hurdles to overcome to achieve such a structure.


DB to DC

A feature which distinguishes the Belgian system from other major countries is the much slower transition from defined benefit to defined contribution arrangements.

International bank ING is one company that has taken the decision to close its DB pension fund to new entrants and create a DC plan on the side. 

ING pension funds assistant manager Olivier De Deckère said now ING has a DB plan for anybody who joined before 2007 and a DC one for new entrants after 2007. He explained: “We gave the opportunity for all the active members to switch at the beginning of 2007. However, in Belgium you can switch only for the future, so the vested seniority is frozen but salary increases are taken into account until the employee retires.” 

He added: “ING created a DC plan for two reasons. First, this allows the employer to limit the impact of IAS19 volatility, which is the volatility linked to balance sheet of the sponsor. Secondly, we don’t see any more people beginning work with one employer and ending their career there. People hired now have some five and 10 years work with ING and then change. In those cases, a DB plan is not interesting for employees.”

Lane Clark & Peacock managing partner Peter Bastiaens said the DC space was further enlarged by the creation of sector or multi-employer pension schemes in 2002, He said: “The vast majority of multi-employer pension funds – which are all DC – were created during the last few years. While initially this type of scheme was almost non-existent, virtually all sectors are looking into its opportunities now.” 

However, the Belgians have their own specific version of a DC plan which includes by law an interest guarantee and makes the employer bear part of the investment risk. 

Fortis Investments Belgium chief executive Olivier Lafont said: “I think the switch is pretty low in Belgium and I think the reason is that you would not have the 100% benefit in switching as a sponsor. Interest guarantee made the switch much less dramatic in Belgium, since sponsors maintain the risk for the 3.25% of underfunding. The new pension funds starting are mainly DC but I can’t say there has been a major switch on the existing funds.”

This in turn has had effects on the investment behaviour of the different funds and whether companies decided to keep the pension fund in-house or to use an insurance company.


Investment trends

Despite being known as conservative investors, Belgian pension funds did not survive market turbulence unscathed. Like their foreign counterparts, Belgium funds posted significant losses.

Dexia Asset Management head of client relations and solutions Vincent Hamelink noted market decline pushed funding levels from 130% at the end of 2007 to 103% at the end of 2008. As a result, he said, approximately half of them were forced to develop recovery plans for the supervisory authority. 

In addition, allocations to all asset classes were affected. Fortis senior institutional client relationship manager Mark Desmet said in 2008 the equity allocation was at 28.7%, remarkably low according to historical standard. 

He explained: “If you look at data from 1985, the peak of equity allocation was in 2000, with 49.9% allocated to equities and 40% in 2007. However this low weighting was purely due to market effect, since the value of equities decreased. Until today most pension funds have not rebalanced into equities, so the weight of this asset class is still below the average in the past.”

If the result is broken down by pension fund size, Desmet pointed out the average equity allocation for funds with assets under management above €1bn is 27.6%, while smaller funds – with AUM below €100m – show an average equity allocation of 37%. He noted smaller pension funds tend to give balanced mandates to their asset managers, who would act a lot quicker in rebalancing. 

Lafont added new contributions were generally held in high quality money market funds and not allocated into equities or bonds. An example of this approach is the ING pension fund.

De Deckère said the ING pension fund – which has €500m under management – had 35% in equities, 40% government bonds, 15% in corporate bonds, 7% in real estate, and 3% in cash. Part of the cash will be reinvested in the near future, he said.

Like the majority of Belgian pension funds, ING does not have any sizable allocation to alternatives. He said: “We have a small allocation to a fund of hedge funds – included in the equity part of the portfolio – but we will propose to the investment committee to divest. We decided to do so because we have no more confidence in the added value of hedge funds in the long term and on the other hand it is for ethical reasons. We don’t think it is a good idea for a pension funds to invest in vehicle which do not help countries to grow.”


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