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Diary of an Investor: Patience is a virtue

Once our half-yearly reports are out of the way, the summer months are usually a good opportunity to look through our portfolio holdings and to read up on the trends and forecasts that some of the industry’s foremost commentators are making. 

Geert, our head of investment research, handed me a thick report from one of our managers on the outlook for the global economy on his last day before his summer holiday. ‘It doesn’t look like great reading,’ he said, as he headed for the door.

In 2014 our portfolio performed incredibly well, in large part thanks to our high level of interest rate hedging, which the regulator has ‘encouraged’ us to maintain. This year, returns have not been so kind, particularly in the second quarter. Fortunately Rolf, our long-standing chairman of trustees, understands that one quarter’s performance and funding ratio development do not tell the real story. 

Rolf’s understanding and patience are exemplary. And these qualities are particularly in need when the regulator changes the rules. Unfortunately this is something we are used to.

Luckily Wasserdicht’s Dutch pension fund is sufficiently financially robust to withstand these hitches, but it was particularly unpleasant to see our solvency ratio decrease, even by a small amount, when the regulator decided, without warning, to adjust the rate we are obliged to value our liabilities against.

Back in the old days, which in Dutch pensions is defined as pre-2007 when the FTK financial assessment framework was introduced, we used to discount our liabilities at a fixed rate of 4%. That was when Dutch government 30-year paper was yielding more than 4%, which these days seems sky high. Then, from 2007, we had to discount the liabilities against the euro swap curve. 

But the swap rate became artificially low and led to low funding ratios, which in turn led the regulator to force pension funds to cut benefits. That was unpopular, so from 2012 we discounted the liabilities against the ultimate forward rate, which brought us in line with insurers. The ultimate forward rate was just over 4% so it seemed like we had gone full circle.

Now the regulator has taken the opposite step and lowered the ultimate forward rate, having decided to calculate it against a market average. This has reduced our solvency ratio, although thanks to our strong position we are not close to the danger zone of having to submit a recovery plan.

‘What a load of old nonsense,’ was the predictable response from my old friend Ronald, who is CEO of Pensioenfonds Vorkhef, the pension fund for forklift drivers. 

Rolf was also predictably down to earth in his response. But he has seen these things before. ‘Now that is out of the way we can concentrate on the important matters,’ he said. ‘Like working out which asset classes are actually going to make a good return.’

Pieter Mullen is investment director at Wasserdicht Pension Funds

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