Keeping an eye on the markets
What are the opportunities and challenges for 2011?
• Invested assets: €2.6bn
• Participants: 92,000
• Both DB and DC
• Solvency ratio: 100% (Dec 2009)
• Date established: 1989
It is difficult to know what to expect from the new year, which means we as a Pensionskasse have to be prepared for all eventualities and be able to respond quickly to any changes in the capital market.
Throughout 2010 we took a numer of asset allocation decisions so as to be geared up for all kinds of capital market scenarios and be less affected by certain developments - for example, a rise or fall in interest rates. In other words, we have reduced our interest rate sensitivity following a scenario analysis programme and the development of an overlay management, which enables us to actively intervene.
We will also continue to be very cautious with investments in government bonds although we never had a significant exposure to government bonds in Portugal, Ireland, Greece and Spain. The small portion of this kind of government bonds is under the protective shield of the European Union.
But our asset allocation will continue to change over time. For 2011, we are probably going to continue the big move out of government bonds into other fixed income or other asset classes.
One of the challenges for 2011, as every year, is to keep the focus on the long term. Often the long-term horizon gets lost because pension funds are measured by their annual return. Another challenge is to accurately measure the downside risk. Communication with our clients, the plan sponsors, also remains important to us in order to find the best investment strategies together.
For many years now there have been discussions about a revision of Austrian pension fund law, which might happen in 2011. However, I do not expect a revision to solve all the problems pension funds have. On the contrary, I believe a revision would increase our efforts and costs as we would need to supply even more data to the regulator who requires it only ever post-event, in other words after has horse has bolted.
We have also already had discussions about the introduction of Solvency II, the updated set of regulatory requirements for insurers in the EU, which comes into force in January 2013. Although we expect the impact on us to be limited in scope, we are strongly against the introduction of these rules, which do not fit pension funds in any shape or form.
Construction Workers Pension Scheme
• Invested assets: €1.2bn
• Participants: 300,000 of which 30,000 are active
• Solvency ratio: 112% (Sep 2010)
• Date established: 2006
The bailout of the Irish economy has not affected us much in terms of our investment returns because the asset allocation of the pension fund does not have a high exposure to Ireland. However, the level of unemployment has affected our members who work in the construction industry and consequently the income our scheme receives from them.
Active membership in our fund has dropped by two thirds over the last three years from 90,000 to around 30,000 now. Once the contributions come in they go straight into the members’ funds to be invested, so it does not affect their funds. But as we depend on the 2% of contributions by members and there has been a dramatic drop in the income available for administration, we had to tighten our belts.
For 2011, we expect a slow growth in the Irish as well as the world economy that should generate us positive - albeit low - returns.
The government’s four-year recovery plan should bring Ireland out of the doldrums the country is currently in. There is a lot of talk among the opposition parties that if they get into power they will renegotiate the agreement with the IMF and EU but it is difficult to know if there is any room for renegotiation.
With regard to our investment strategy, there are no major changes planned for 2011. Our current asset allocation has seen us through the bad times and it is not the right time to change it. However, we will keep a close eye on our strategy and our asset allocation and although we expect to stick fairly rigidly with it we can easily manipulate our holdings in any particular asset within our bands as markets change, to take advantage of opportunities when they arise.
We started a process of disinvesting in peripheral bonds in 2010 but as the bond market is currently very illiquid, and following the Irish governments budget announcement regarding new bonds and sovereign annuities, we have put this on hold for the moment until we see what the outcome of the bond story is going to be.
What we have learned from 2010 is not to be dragged into any particular euphoria that might beset a particular asset class. We aim to stay well within the parameters we have set for our different asset classes irrespective of how those asset classes perform in the short term.
Pensioenfonds Openbare Bibliotheken
• Invested assets: €1.1bn
• Participants: 11,000
• Coverage ratio: 109% (Nov 2010)
• Date established: 1957
The biggest problem for Dutch pension funds this year has been the low interest rate - which is the criterion for discounting liabilities - although it improved from 2.6% in August to 3.6% in December. In addition to this, new longevity tables have meant that pension funds have had to increase their liabilities by 7%.
Dutch pension funds that are below the minimum coverage ratio of 105% will have to cut benefits in 2011, but most were set to end 2010 above the 100% level.
With a coverage ratio of 110% we were on course to end 2010 with the 112% coverage ratio required from us by the regulator, but we still constantly look to increase the returns from investment possibilities. At the same time we also try to reduce our risk, which makes the situation we are in a bit tricky. The pension fund board has been discussing what kind of risk the scheme can take taking into account the last 15 years of the fund’s investment history.
We aim to increase our exposure to bonds and decrease our allocation to stocks.
One asset class we introduced in 2010 was convertibles because they are less risky than stocks but riskier than bonds. They will continue to play an important part in the new year. We have also been looking at possible private equity investments but that process has been taking place at a slower pace than the developments in convertibles.
We would like to add more liquid assets to our asset allocation, which currently consists of bonds, stocks, property, hedge funds, commodities and derivatives such as swaps.
In the first quarter of 2011, we will have a discussion about swaps and swaptions, assess how they protected our current assets and how we will apply them going forward.
The lesson we have learned in 2010 is not too be too nervous about making short-term predictions as required by the regulator because when there is so much volatility in bonds and interest rates it is impossible to make calls for a long period ahead although naturally as a pension fund we look 10-30 years ahead, not three to six months ahead.