The €23bn Philips pension fund is reducing its equity allocation by 7.5 percentage points to 32.5% in order to protect its €5bn buffer, the fund said in a newsletter on its website.
As part of the decision to dial down risk, the pension fund for the electronics firm is upping its allocation to government bonds and cash. It has also replaced its dynamic interest rate hedging policy by a fixed hedge, at 50% of real liabilities.
The Philips fund, which had a funding ratio of 127.7% at the end of September, is taking the measures anticipating on the planned move to a new defined contribution (DC)-based pension system by 2024.
The fund’s buffer has increased considerably over the past one and a half years thanks to rising interest rates and buoyant equity markets.
“This means the fund now is in a good starting position with regards to the transition to the new pension system,” according to the fund’s board.
The switch to a less risky investment policy is meant to protect the buffer against turmoil on financial markets. The downside of the decision is that the fund will benefit less from rising equity markets than previously.
The change in the risk profile of the investment portfolio is one of three measures the fund has taken in preparation for the pension transition. The second measure is that it plans to maximise indexation according to more relaxed rules that will come into force from 1 January 2023.
Under the new rules, under which indexation no longer needs to be ‘future-proof’, the pension fund’s current financial position would allow for full indexation from 2023.
The fund’s third measure is a reduction of new from 1.85% to 1.65% of pensionable salary for its 13,000 active members.