KBC banks on three-fund pension strategy

Its funds include a basic scheme, a plan for senior management and an international scheme.

Its international pension fund, created in 2009, manages a cash balance plan, which is a defined benefit (DB) scheme run like a defined contribution (DC) plan with hypothetical individual employee accounts. The €5 million (£4 million) international fund guarantees an annual return of 5% on all contributions for its 200 expatriate employees.

Edwin Meysmans, director at KBC Global Services, says the plan was set up when the bank started to make acquisitions in eastern Europe, particularly in the Czech Republic, Slovenia, Hungary, Slovakia and Russia.

“To run these operations, we sent a number of senior managers from Belgium to assist the local people and integrate the new bank into the group,” he says.

“In the beginning, we would suspend their Belgian pension and make up what they had lost when they came back, but this was difficult because the remuneration package looked quite different from that of local employees, and technically it was difficult to know what to include, such as housing allowance. Another concern was whether tax was deductible on contributions.”

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In 2012, KBC paid €97 million (£78 million) in contributions to the basic scheme, based on a 9.82 % rate; €8 million (£6 million) into the senior managers’ scheme, based on a 15% rate; and €1.2 million (£1 million) into the international plan, based on a 10% rate. The funds adopted a liability-driven investment strategy in 2007, hedging their liabilities against interest rate and inflation risk by using a dedicated fund comprising interest-rate swaps with varying durations and 200% leverage.

Meysmans says: “Compared with other Belgian or European funds, we do three things differently: we have no exposure to government bonds, but use interest-rate swaps for hedging liabilities; 20% of our equity exposure is in a low volatility/ minimum-variance strategy; and we invest in real assets other than real estate, such as infrastructure.”