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IPE special report May 2018

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Low rates prompt huge bond move at Philips

NETHERLANDS – The €12.5bn Dutch pension scheme of electronics giant Philips has increased its fixed income exposure in a bid to cut its sensitivity to interest rates.

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.

“This change was a result of actions taken by the Dutch pension fund to reduce its interest rate sensitivity,” Philips stated in its 2004 annual report.

It added: “Equity risk for the Dutch pension fund has been reduced with the aforementioned shift to fixed-income investments during 2004.”

IPE reported in March that investment policy amid low long-term interest rates had become a key question at Dutch pension funds.

The Philips report states that a one percent fall in interest rates results in a 7.2% decline in funded status. The discount rate used to calculate the scheme’s benefit obligations has been cut to 4.5% from 5.3%.

The target allocation to fixed income is 60% for 2005. The target for 2004 was initially set at 45%, but the final allocation came in at 59%.

This followed an “extensive asset-liability management review” and an agreement with the unions which led to a change in strategic investment policy.

It said: “The expected long-term rate of returns on assets for the plan in the Netherlands will be 5.7% in 2005.” Debt is expected to return 4.5%. Equities are expected to return eight percent.

The Dutch scheme covers 64% of Philips’ total pension benefit obligation. It said that in relative terms the scheme’s sensitivity is lower than other corporate plans.

But “the interest-rate risk for the Dutch pension plan compared to the company’s total pension obligations is still larger than that for the other countries”.

Lars Dijkstra, head of investments at the scheme, left in February.

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