Forward, Unilever’s new collective defined contribution (CDC) pension fund, has reported a 20.5% loss for the last nine months due to rising interest rates and falling equity markets.
In its annual report, Forward’s board said the scheme recorded a loss on its 35% interest hedge of more than 17 percentage points, after long-term interest rates began to climb over the second quarter.
At the same time, equity markets entered a period of decline, hitting returns by another 3 percentage points.
In terms of funding, however, the scheme, launched in April 2015, remains in good shape, reporting a coverage of 137% as of the end of September.
At launch, Unilever contributed €15m to the scheme as starting capital and paid an equal amount for indexation for active participants.
The latter allowed Forward to grant workers full salary indexation of 2.15% while paying pensioners 0.44% inflation compensation based on the consumer index.
At year-end, the scheme’s assets amounted to €63m, against €38m of liabilities.
Forward’s board warned that both its assets and liabilities were set to grow substantially in the coming years, reducing the positive impact of the starting capital on its funding ratio.
The pension fund’s investment policy is based on a 60% return portfolio and a 40% matching portfolio, with an interest hedge ranging between 30% and 50%.
The board said the scheme needed to generate returns of at least 5.5% over the long term to achieve its indexation target.
It pointed out, however, that part of the required return had already been factored into the valuation of its liabilities, currently based on a relatively low interest rate.
“As a consequence,” the board said, “as long as the interest level remains low, a return of between 1% and 1.7% will suffice for indexation.”
Forward and Progress – Unilever’s defined benefit fund, closed in April last year – share the same investment philosophy, but, owing to the former’s smaller size, as well as its members’ objectives, their asset allocation differs.
In November’s How We Run Our Money, chief executive Rob Kaal says Forward’s portfolio has greater potential on the risk/return side.
On the one hand, he says, its smaller size means it cannot take advantage of all the asset classes available to larger investors, such as Progress.
“But the required return is slightly higher because of the different member population,” he adds. “In Forward, downside protection is particularly important because participants bear the risk, and there is no employer protection in place.”
Since Unilever closed Progress, all new pensions accrual has gone to Forward.
The company is awaiting a licence for its general pension fund (APF), which is to accommodate both schemes.
With this arrangement, Unilever hopes to simplify governance and achieve the benefits of scale.