Pension funds in the Netherlands delivered an average return of 10.2% after costs in 2020. Returns varied widely, between 0.5% and 20.1%, with smaller funds doing somewhat better than the largest schemes.

Consultancy LCP compiled the returns of 184 pension funds based on figures provided to regulator De Nederlandsche Bank (DNB). The 10.2% average return includes the return on interest rate hedges. If one accounts for the size of pension funds, the average return drops to 8% as on average the larger schemes did worse than their smaller peers.

Pension funds made the best returns on their interest rate hedges, as interest rates dropped to record lows over the year. The remainder of the returns was made on equities and other return assets such as real estate.

The 8% average weighted return was about half the size of 2019’s returns of 16.7%. LCP’s Jeroen Koopmans estimated the positive 2020 returns were an unexpectedly good result for pensions funds.

“If I had told them in March that they would eventually achieve an 8% return for 2020, they would have probably told me I’m crazy. The 8% return is close to the long-term average which lies between 7 and 8%,” he said. This is remarkable for a far from average year like 2020.

An in-depth look at the numbers shows a return gap between sector funds, which on average achieved a 7.7%, and professional and corporate schemes, which achieved respective average returns of 10.2% and 8.9%.

This can be explained by the lower interest rate hedge of especially the largest sector funds ABP and PFZW, according to Koopmans.

Hairdressers scored best

According to LCP’s calculations, the pension funds for hairdressers (Kappers) and travel agents (Reiswerk) and the fund of wholesale trader Sligro performed best.

This is rather ironic, since the sponsors of all these funds were hit very hard by the coronavirus pandemic. Hairdressers in the Netherlands only re-opened recently after having been closed for three months under the Dutch government’s strict lockdown rules.

Sligro depends on restaurants and other food retailers for most of its revenues and has seen its sales drop dramatically as cafes and restaurants continue to be closed.

The funds for IKEA, another coronavirus victim, and financial regulator AFM also did well, with both funds posting returns of approximately 19%.

According to Koopmans, the main cause for the high returns at Sligro, Reiswerk and AFM was their high level of interest rate hedging. For these funds, the return on their interest rate hedges varied between 11.7% and 15.7%, much higher than the 4.9% return for the average pension fund.

These funds also have a relatively high allocation to the return portfolio, and the combination with a high level of interest rate hedging clearly was a winning combination, said Koopmans.

The consultant is somewhat surprised by Kappers’ number-one spot, since this fund invests less than 20% in the return portfolio.

“But we know this fund has a relatively long duration, which makes it extra sensitive to interest rate movements. I assume the bulk of the return for this fund can be attributed to the matching portfolio. IKEA is also a very young funds which has benefited from the same dynamic,” he added.

The worst-performing funds were the corporate schemes of holding company HAL (the owner of daily Het Financieele Dagblad), Heineken and Shell, which recorded returns between 0.5% and 3.4%.

“These funds all have quite a low level of interest rate hedging. Besides, both Heineken and HAL have a high allocation to their return portfolios, but realised very low returns,” Koopmans said.

To read the digital edition of IPE’s latest magazine click here.