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IPE special report May 2018

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Dutch chemicals firm records 66.6% gain from ground lease investment

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PDN, the €6.9bn pension fund of Dutch chemicals firm DSM, generated a net result of 7.5% last year, in part thanks to a 66.6% gain on an investment in long-term ground leases.

Bob Puijn, PDN’s chief investment officer, described the investment as a “private inflation-linked loan” and said the pension fund had benefited from investing at the right moment.

“At the time of the investment, in 2013, we could demand a risk premium of 300 basis points combined with a limited risk. Soon after this, the expected inflation decreased,” he said.

According to the CIO, a similar investment now would come with a risk premium of no more than 150 basis points.

Gerard Rutten, PDN’s chief executive, added that the result was in part attributable to a revaluation of the investment last year, “as the initial valuation criteria had turned out not to be in conformity with the markets”.

PDN’s ground lease holdings – 2.1% of its matching portfolio – are a direct investment in future cash flows from heriditary residential ground leases in Amsterdam, Rotterdam and Maastricht.

Since its investment, the asset class generated 37.6% a year on average, according to PDN. It said the combination of a long duration and its inflation link made it a good investment for matching its liabilities.

PDN said it wanted to double its 5% allocation to residential mortgages this year, at the expense of the liquid components of its matching portfolio. Its mortgage holdings yielded 5.9% last year.

The pension fund reduced its interest hedge from 65% to 35% last year, enabling it to significantly reduce its holdings of “nominal payer” swaps. Following a decline in interest rates, the deployment of the passive swaps hit its overall return by 0.9 percentage points.

PDN also said that it hadn’t adjusted its strategic investment policy, “as a reduced risk profile would have hampered achieving our indexation target and would have increased the chance of rights cuts”.

On the other hand, the scheme would not be allowed to raise its risk profile as funding level of 102.8% at year-end was too low, it said. However, its coverage ratio improved to 107.6% as of May.

The pension fund said it had reduced its board by one-third to eight members, in order to increase its effectiveness. Within this new set up, PDN said it could appoint two external experts.

PDN has 28,395 participants, 6,515 of whom are active and 13,655 are pensioners. Last year, it spent 0.29% on asset management and 0.07% on transactions. Administration costs per participant totalled €238.

 

 

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