The Dutch pension asset manager PGGM can’t wait for the planned switch from a defined benefit (DB)-based pension system to one based on defined contribution (DC) to be finally adopted.
“We need the new pension system in order to be able to properly diversify our portfolios,” Jaap van Dam, principal director of investment strategy at PGGM, told a virtual audience at the PensionsEurope Annual Conference 2021, co-hosted by IPE.
“We have been allocating more to higher-return assets like infrastructure, private equity and real estate,” he said. But Van Dam added that more needs to be done in terms of revamping allocations to be able to sustain the current level of pensions in the long term.
“That’s why we are in need of a new pension system to avoid investing to a very large extent in very long-dated euro government bonds or swaps to hedge our liabilities.”
Van Dam acknowledged PGGM’s large government bond allocation has generated handsome returns over the past decade, though. Last year, the government bond portfolios of Dutch pension funds even returned close to 20%.
“In the past we have fared quite well in terms of return generation, but in the future it will be very difficult to generate the real returns we need,” he said.
And in terms of funding ratios, the good returns haven’t made a difference as liabilities have increased by even more due to record low interest rates. “We may be asset rich, but we are solvency poor,” he concluded.
No space for climate focus
François Barker, head of pensions at the consultancy Eversheds Sutherland, who took part in the same conference session titled Adequate and Sustainable Pensions, noted that the DB system is indeed holding pension funds hostage.
He said: “On the DB side, funds are wrestling with large deficits because of a long period of very low bond yields.” As a consequence, they are preoccupied with their funding ratios and the future direction of interest rates and bond yields, he added.
These funds therefore do not have the time or space to think ahead, he noted.
“DC funds [in the UK] are much more focused how to get to a net-zero portfolio driven by the Paris Agreement, for example. Typically they want to be carbon neutral by 2050, but some are more ambitious and want to reach this target already by 2035.”