In the media glare
Nina Röhrbein spoke with Jeroen van der Put, executive director of the PNO Media Pension Fund, about the importance of sustainable management in its asset allocation and risk management
The roots of the €3.5bn PNO Media Pension Fund can be traced back to 1947, when first a health insurance and then a pension fund were founded for the Netherlands Public Broadcasting company, NPO. In 1990, the public broadcaster was split into several companies, which continued to have their pension in the PNO fund. On top of that, new commercial broadcasters, like RTL, also joined the scheme. At present, the scheme holds around 400 employers, ranging from small companies to large production companies like Endemol. The latest scheme to merge with PNO Media is the Dutch film and cinema industry’s €150m scheme. The transfer is expected to be complete this year.
“While most Dutch pension funds oblige their sponsors and employees to join, media companies are free to join our fund,” says Jeroen van der Put, executive director of the PNO Media Fund. “This means we must heavily invest in the acquisition of skills and have a good proposition to attract them.”
The defined benefit (DB) scheme consists of four plans: in one, employees can accumulate up to 2.25% of their annual salary each year as a pension, while the others can respectively hold up to 2%, 1.75% and 1.5%. The plans also differ with regard to the partner pension, which is either based on capital (2.25% and 1.75% plan) or risk (2% and 1.5%). Currently, the 2.25% benefits group has the highest participation rate, but employers are able to switch between schemes.
One of the key principles of the pension fund is to keep its investment strategy simple in order to have better insight into the risks and reduce costs.
The starting point for the investment strategy is its targets and obligations, in other words the pension rights of its members. “Based on those we calculate what kind of returns we need,” says van der Put. “The current return objective on our portfolio is 6% and a tracking error of 10%. From that we derive our asset allocation and risk budgets.”
This has led to an asset allocation of 40% fixed income, 36% equity and 24% alternatives. Alternatives are split between 12% real estate, 6% private equity, 4% commodities and 2% infrastructure. Real estate investments are undertaken via non-listed funds with exposure to US and European property, including Dutch commercial and residential real estate.
“For risk management purposes we assume that these investments are direct investments, take the leverage out of the funds and put it on the other side of the balance sheet,” says van der Put. “We have chosen a specialist real estate investment adviser who only works for pension funds. As we share the costs on this financial product with other pension funds, it is an efficient structure. In addition there is also the added bonus of quality control, especially after the Dutch Central Bank ran some tests on the adviser a year ago that showed high control levels. In the past, we had some listed real estate in our portfolio but because it tended to behave more like equity we stopped those investments.”
The pension fund started its private equity investments in 2001 and commodities in 2005. For efficiency reasons, PNO Media co-operates with another fund to share its investments in private equity. Swaps provide exposure to commodities and were increased over the last 12 to 18 months.
However, on the back of an ALM study in 2010 the fund reduced its overall alternatives exposure from 26% to 24% in favour of fixed income.
The fund’s listed equity allocation consists of 28% developed market and 8% emerging markets investments. Allocation to the latter doubled in 2010 at the expense of its developed market counterpart.
European government bonds make up 9% of PNO Media’s fixed income allocation. Inflation-linked bonds are allocated 10%, corporate bonds 8% and emerging market debt 5%. Short duration and other liquidity instruments amount to 7%. Since last year, 1% has also been invested in microfinance, which is one of the investments undertaken as part of the fund’s sustainable investment strategy.
“The growth of the sustainable part is subject to the demand on returns we have,” says van der Put. “We first look at the risk/return profile for these type of investments. If it looks compelling we try to find a case for investment, such as microfinance or clean-tech.”
In 2005, PNO Media decided to outsource all of its mandates. One basket the pension fund is more deeply involved with is its core portfolio for large caps, Europe and US, which it manages together with a small Dutch non-commercial research company.
“They implement no less than 25 environmental, social and governance (ESG) factors in their models,” says van der Put. “Over the five-year period we have worked with the research company we have had an outperformance of 3% per year over our relevant benchmark, which is a combination of S&P and MSCI indices.
“One of the pension fund’s most recent developments with the company has been a passive mandate where we chose the equity universe and weighted all the selected stocks equally. This has turned out to be a simple and low-cost strategy compared to fundamental indexing and produced a good performance compared to market cap benchmarks.”
During the manager selection process, apart from standard criteria such as track records, PNO Media’s sustainability policy is taken into account. A recently added criterion is remuneration policy. The pension fund has recently had discussions on whether it can do business with certain asset management firms who, it believes, overcompensate their managers. It already engages on remuneration with Goldman Sachs. “If after a year of engagement we do not see enough progress on the issue continuing to do business with the manager may become a problem for us,” adds van der Put.
PNO Media’s risk management runs on several levels. One of these involves monitoring the managers, their reports, risk management and performance relative to the benchmark. On the fund level, the pension fund has a risk measurement mechanism in place, which shows how much it defers from its obligations.
“We have a tracking error of 10%, which we monitor quite strictly in order to minimise the market risk,” says van der Put. “Besides that, we rigorously monitor the interest rate and counterparty risk. This was particularly important during the financial crisis when we decided to have collateral in government bonds only, and not in liquidity funds, which come with some external risk. On top of that we apply a model from the Dutch Central Bank to our insurance, environmental, operational, outsourcing, IT, integrity and legal risk. Every year we evaluate whether we have taken enough measures to minimise the risk to the right levels and whether these levels are still appropriate or not.”
The crisis only confirmed the need for such a heavy risk management structure. It also led to faster and more frequent reporting. On a bi-monthly basis, the pension fund’s investment board assesses the risks applied to several economic scenarios and the use of possible hedging strategies and their effect on the fund’s coverage ratio.
As of December 2010, PNO Media’s coverage ratio stood at 99%. New mortality tables in 2009 and 2010 meant that Dutch pension funds had to take several percentage points extra into account in their evaluation of liabilities. This cost PNO Media 2.5% on its coverage ratio in 2010 and 5% in late 2009; in other words it had to deduct 7.5% of its coverage ratio in 18 months. Total obligations rose by 12.6% while investment returns generated 13.6% in 2010 - comprising an investment return of 11.5%, 4.7% from the interest hedge and -2.6% from the currency hedge - which resulted in a 1% increase in the coverage ratio on 2009.
“There are discussions in the Netherlands to change some of the hard rights of pension fund members to softer rights so that, for example, 20% of their rights are linked to economic circumstances,” says van der Put. “We hope that the Dutch government will make a decision on this in the first quarter of 2011. If that happens, we will have to change our investment strategy to include, for example, overlay strategies or more conservative investments in order to guarantee those 70-80% hard rights.”
Another discussion, says van der Put, surrounds buffer requirements. At present they need to have buffers of approximately 20%, meaning the coverage ratio needs to be 120% or above. But risks are now believed to be higher than assumed in the past, which would require a coverage ratio of 130-140%.
If that is agreed, PNO Media will remain in an ‘under observation’ position by the Dutch Central Bank for longer and will not be allowed to increase the risk in its portfolio.