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PGB introduces dynamic equity risk management

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Dutch multi-sector scheme PGB has extended its dynamic investment policy with the introduction of dynamic equity risk management.

In its annual report for 2018, the €26bn pension fund said the new tool was aimed at limiting downside risk during falling equity markets through selling or buying index put options.

However, it said that, in order to save costs, it would only buy these options if there was a higher risk of equity prices falling, no extreme market drops had occurred recently, and if costs were acceptable.

The pension fund reported an overall loss on investments of 2.3% for 2018, chiefly due to declining equity markets in the last quarter. This marked the first time it had incurred an annual investment loss since 2008.

“This development highlights how volatile the market climate is and how changeable the pension prospects are,” said Ruud Degenhardt, the scheme’s chairman.

PGB’s funding stood at 108% at April-end, well above the minimum required level of 104.3%.

Alternatives were the scheme’s best performing asset classes, with property and private equity generating 12.9% and 17.3%, respectively. Infrastructure gained 4.8%.

However, these positive results were more than offset by an overall loss of 9.6% on the scheme’s equity allocation.

PGB attributed this result largely to underperforming active managers in emerging markets, as well as value-driven and momentum-driven factor funds.

It added that the 7.5% loss on alternative fixed income – comprising emerging market debt – was chiefly the result of badly performing active positions, and that it had subsequently sacked the manager.

The multi-sector scheme said its combined holdings of German and Dutch government bonds, interest swaps and interest futures had gained 10.4%.

Bonds had performed much better than euro-denominated swap rates following Brexit developments and tensions between the EU and Italy about the latter’s budget, PGB said.

The scheme’s portfolio of euro-denominated credit lost 0.2% as a consequence of rising premiums for credit risk. The pension fund’s mortgages holdings delivered 2.1% due to falling interest rates for long-duration loans.

The pension fund said it had benefited from the lack of a full hedge of the dollar “as the US currency had appreciated relative to the euro”. Its cover of the dollar exposure stands at 50%.

PGB also said it was prepared for a no-deal Brexit, and that its existing investments in UK-domiciled investment funds would not be affected.

Supervisory board chair exits

The annual report also revealed that Nico Meeuwisse, chairman of PGB’s supervisory board (RvT) had prematurely resigned at the start of this year, following a dispute with the pension fund’s board about a reassessment of strategy and governance.

A spokesperson for PGB attributed the issue to a lack of clarity about the demarcation of responsibilities between the scheme’s board and its governing bodies, adding that new arrangements had been made since.

Currently, PGB’s supervisory board comprises Alfred Slager and Orpa Bisschop.

The pension fund reported administration costs of €176 per participant, and that it had incurred asset management and transaction costs of 0.32% and 0.1%, respectively, last year.

PGB has 244,000 workers and 78,000 pensioners, affiliated with 2,555 employers.

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