Chart of the Week: Dutch schemes bounce back with Q1 gains of up to 8.5%
The five largest Dutch pension funds reported returns of up to 8.5% during the first three months of this year.
They credited strong equity markets for their “above average” results, as well as rising government bond prices.
The pension funds posted positive results across almost their entire investment portfolios, in stark contrast to the weak returns reported for 2018.
Civil service scheme ABP and healthcare pension fund PFZW posted quarterly results of 8.2% and 8.5%, respectively, and saw their assets increase to €431bn and €217bn, respectively.
The €61bn sector scheme for the building sector (BpfBouw) generated 8.1%, while the metal pension funds PMT (€77bn) and PME (€50bn) delivered 7.5% and 7.8%, respectively.
Equity markets add double-digit returns
ABP chiefly attributed its 14.2% profit from equity investments to the prospect of a trade deal between the US and China, as well as the fact that both the ECB and the US Federal Reserve had refrained from raising interest rates so far this year.
Developed market equity investments gained 14.3%, while emerging markets added 13.9%.
BpfBouw reported a 13.9% gain on its entire equity holdings, while PFZW returned 11.5%.
“I cannot explain to our participants and pensioners if we have to reduce pensions in 2020, while… we are achieving good returns and have more assets than ever”
Eric Uijen, PME
Private equity delivered quarterly profits of 3% for ABP and 1.5% for PFZW. Infrastructure holdings at both schemes added 2.9% and 0.1%, respectively.
ABP said its hedge fund allocation gained 1.6%, while PFZW indicated that its mortgages portfolio had produced a 1.3% profit.
Fixed income and real assets
Falling interest rates meant schemes’ fixed income allocations also generated above-average results.
ABP posted an overall gain of 3.9%, with long-duration government bonds and emerging market debt delivering 5.4% and 6.6%, respectively.
PFZW reported returns of 1.7%, including a 3.3% gain from government bonds. However, inflation-linked bonds lost 19.4%.
Schemes’ quarterly profits on property ranged from 0.8% (PME) to 10.4% (ABP).
BpfBouw’s property portfolio gained 4.8%, with Dutch offices and North American real estate particularly strong.
Commodities was the best performing asset class for PFZW and ABP, delivering profits of 24.2% and 15.8%, respectively.
ABP lost 0.1% on its combined hedge of interest rate, currency and inflation risks.
BpfBouw lost 0.6% on its currency hedge as a consequence of the euro appreciating relative to the US dollar, but it gained 1.9% from its interest rate hedge. PFZW said it made a 2.4% profit on its combined interest rate and currency cover.
Schemes gloomier about looming rights cuts
Despite the healthy quarterly returns, four of the five largest pension funds warned that the likelihood of future cuts to pension rights and benefits had increased.
ABP, PFZW, PMT and PME said their relevant funding levels had dropped by up to 1.4%, falling several percentage points short of the required minimum of 104.3%.
PFZW’s funding level fell to 100.9% despite its strong return. Peter Borgdorff, its director, said the threat of cuts had never been greater. The healthcare scheme’s funding level must reach at least 104.3% by the end of next year in order to avoid rights cuts in 2021.
Interest rates had never been lower in PFZW’s 50-year history, Borgdorff said, meaning the Netherlands’ current pension arrangements and regulation were no longer effective.
Eric Uijen, executive chair of PME, said that he could not satisfactorily explain any cuts to his members if implemented in 2020.
“We are on the eve of a new pensions agreement… we are achieving good returns and we have more assets than ever,” he said.
However, PME, which serves the metal and electro-technical engineering sector, closed the first quarter with a coverage ratio of 100.6%. This has to improve to 104.3% by the end of 2019, as does the funding level of its sister metal and engineering sector scheme PMT, which recorded a 101.7% coverage ratio at the end of March.
PMT said implementing pension cuts despite a coverage ratio of more than 100% was a “bad idea”. It demanded at least a temporary solution to avoid benefit reductions.
Corien Wortmann-Kool, chair of ABP, highlighted that the chance of a reduction of pension payments in 2021 was still real. ABP’s funding stood at 102.4% at the end of March.
BpfBouw, the sector scheme for the building industry, is the only one of the Netherlands’ top five schemes without concerns about benefit cuts: despite a 0.8% funding drop, its coverage ratio stood at 117.5% at the end of the first quarter.