NETHERLANDS – As part of a new investment strategy, the €13bn Philips’ pension fund has created separate portfolios for liabilities and returns, according to its annual report.
The liability portfolio must match at least 75% of the fund’s liabilities and reduce the fund’s sensitivity to interest-rate movements. It comprises of investments in bonds with a liabilities-matching duration.
The return portfolio is aimed at covering the remainder of the interest rate sensitivity and must provide a return to funding any optional inflation adjustments. It mainly consists of investments in equities and direct real estate.
In April Philips said the scheme had raised its fixed income exposure in a bid to cut its sensitivity to interest rates. And last month the company outsourced the management of the assets to Merrill Lynch Investment Managers.
The move at the Dutch scheme was so big it increased the total bond exposure at all Philips’ schemes by nine percent at the end of 2004, to 57%. There was a corresponding decrease in equities, the firm said.
Now the scheme reports that after the completion of the change in the final quarter of 2004, the scheme has reached its target of approximately 60% fixed income and 25% equity, showing an increase of 42% and a decrease of 27% respectively. The remainder has been invested in real estate and cash.
The scheme reported a total return on investments of 10.6%, an improvement on the external benchmark of 8.9%. Within the equity portfolio - yielding a total return of 13.7% - European and Japanese equity performed well. Bonds and real estate delivered returns of 9% and 4.6% respectively.
The scheme said that under the transitional rules of the new financial assessment framework, or FTK, which will come info force on January 1 2006, the scheme doesn’t have a reserve deficit.