Executives at Pensioenfonds KBC, Brussels, increased the defined benefit fund's inflation hedge last month to add further protection against future spikes, Luc Vanbriel, the fund's CIO, told Pensions & Investments in an interview.
The €2 billion ($2.1 billion) Belgian pension fund for employees of financial services company KBC increased the size of its liability-driven portfolio to boost the inflation hedge to 75% from 55%.
Inflation-linked assets increased to 41% from 25% of total assets. Mr. Vanbriel said that the fund sold listed equities and decreased the bonds exposure to grow its LDI portfolio. The bonds allocation decreased to 5% from 13%, while the equities allocation dropped to 27% from 32%. The rest of the allocation was funded from cash and some unlisted real estate.
"I think LDI is even more relevant now than it used to (be) because the real interest rate increased and we now realize that inflation can peak suddenly," he added.
Eurozone inflation peaked in November at 10.1%, then declining to 9.2% in December and 8.5% in January, according to European Central Bank data.
Mr. Vanbriel said that the fund's basic scenario is that inflation will start decreasing toward the ECB's 2% target.
"But …what I have learned in the past years is that nobody can predict inflation," he said, noting that after the 2009-10 European sovereign debt crisis, European governments injected money into the real economy to try to fuel inflation. "And we didn't see any inflation. Then suddenly there is an energy crisis due to war (in Ukraine) and supply chain problems, and suddenly we see (a) spike in inflation," he said.
Mr. Vanbriel said he was aware of the LDI crisis in the U.K. — when a sharp rise in interest rates in September caused some U.K. pension funds to become forced sellers of assets at significant losses in order to meet the collateral calls related to leveraged LDI portfolios. But he said KBC's LDI portfolio would be well-protected from losses as the fund's executives have always "insisted on the counterparty accepting government bonds" for use as collateral for hedging positions.
The fund's LDI exposure comprises government bonds, covered bonds, corporate bonds and bonds issued by financial services companies. "We can use government bonds and covered bonds, which is about 50% of the exposure, as collateral for the swaps for the counterparty," he added. Covered bonds include European mortgage loans and public sector loans.
Mr. Vanbriel noted that European pension funds are less likely to run into liquidity issues because their holding of government debt is much smaller as a share of the total eurozone debt market than in the U.K.
