The €26bn Dutch multi-sector scheme PGB has divested its holdings of inflation-linked bonds, as the allocation hadn’t met expectations due to limited inflation. 

In its annual report for 2017, PGB said it had reinvested the 5.2% allocation in other securities, including its equity portfolio, which increased from 40% to 43%.

Last year, the inflation-linked bond (ILB) portfolio returned 1.6%.

PGB reported an overall result of 6.7% and said that almost all asset classes had outperformed their respective benchmarks.

Rising interest rates also contributed to reducing the scheme’s liabilities and improving its coverage ratio, which had increased to 108% at April-end.

Ruud Degenhardt, PGB’s chairman, said the board was “very cautiously” considering granting members partial inflation compensation. He estimated that indexation in arrears had increased to at least 10%.

The chair said that PGB’s dynamic balanced management – introduced in 2015 to generate additional returns for indexation – had again delivered surplus results, amounting to €256m in 2017.

Under the dynamic balanced management sytem, the scheme’s investment risks move up and down with the scheme’s funding, while its interest rate hedge – more than 45% at year-end – follows the interest rate level.

The pension fund said it also followed market trends and used valuations and momentum in its strategy.

Last year, PGB was named best pension fund in the Netherlands, at the IPE Conference & Awards in Prague, due to its balanced management approach.

The pension fund’s positive result was entirely due to its return portfolio, which generated 12.8%, with equity delivering 11.1%.

With a return of 20.4%, emerging markets equity produced the best results. Property, infrastructure and private equity yielded 8.5%, 5.1% and 8.7%, respectively.

In contrast, PGB lost 0.2% on its matching portfolio, which still was an outperformance of 1% relative to its benchmark.

Euro-denominated government bonds lost 3.6%, whereas euro-denominated credit and mortgages gained 1.2% and 4.4%, respectively.

PGB’s board indicated that it considered the update of the Dutch pensions system as a strategic risk to its pension products, its IT structure as well as its pensions provision.

“A new system should resemble our current operations as closely as possible in order to reduce the risks,” said Degenhardt. “That’s what our clients also want.”

He said that the multi-sector scheme had already started preparing for the effects of new pensions legislation through scenario analyses.