The €26bn Dutch pension fund of ABN posted a 12.3% gain in 2016 due to its strategic use of leverage.
The return exceeded the yield from its matching and its return portfolios, which returned 10.9%, according to the fund’s annual report.
The scheme said it had leveraged 2.7% of its assets through derivatives at year-end, to cover a larger part of its interest risk and to reduce the volatility of the balance sheet, without limiting the potential for a surplus yield on its return portfolio.
At the end of 2016, the pension fund had hedged 52% of its portfolio against the risk of interest rates rising. The ABN Amro Pensioenfonds said it would raise the hedge if funding – 125% at the end of last May – fell below 110% and interest rates rose.
Its currency hedge covered 65% of its equity holdings and 100% of its fixed income investments in developed markets.
The bank scheme applies a dynamic investment policy, increasing its liabilities portfolio if interest rates rise and reducing its return holdings if it has particularly a low or high funding level.
Last year, the pension fund increased the strategic weighting of its return portfolio – meant for creating potential for indexation – from 43% to 50%.
At year-end, the return portfolio had allocations to equity (38.1%), credit (5.9%), and emerging market debt (4.8%). It also had small holdings in catastrophe bonds and property.
At the same time, the exposure of its matching portfolio of euro-denominated government bonds – predominantly Dutch and German government paper – was 52.2%.
Currently, the pension fund implements a collective defined contribution (CDC) plan, but it said it was preparing for the possible introduction by the employer of individual defined contribution arrangements. The contract with the sponsor for the CDC plan is to expire in 2019.
The pension fund reported combined asset management and transaction costs of 0.11%, citing its predominantly passive investment policy as keeping costs low.
Administration costs per participant amounted to €161, a €7 drop relative to the previous year.
The ABN Amro scheme has 98,500 participants in total, of whom 19,170 are employees and 26,055 are pensioners.