Philips pension fund ramps up investment risk to grant indexation
The €16bn pension fund of electronics giant Philips has decided to increase its investment risk in order to achieve its target of full indexation.
Last year, it returned 0.9% and saw its funding ratio rise from 104% to 108% as a result, according to its 2013 annual report.
The Philips scheme operates a liability-matching portfolio – meant to finance 64% of its liabilities, as well as 2% inflation – and a return portfolio for its remaining liabilities, longevity risk and additional inflation.
Following the new investment policy, the board wanted to reduce the scheme’s holdings in euro-denominated government bonds within the matching portfolio to 62.5%, triple investments in global government bonds and introduce a similarly sized credit allocation.
It also wanted to increase its direct investments in Dutch mortgages by 1% to 7.5%.
Within its return portfolio, the scheme intended to decrease its equity and property exposure slightly in favour of commodities, high-yield bonds and emerging market government bonds.
The board said it decided to shift emerging market equity and developed market government bonds to a passive style, while keeping credit and mortgages under active management.
“The advantages of active management don’t outweigh the disadvantages,” it concluded following an internal survey.
The pension fund incurred a 4.3% loss on its matching portfolio but noted that the result still meant a 1% outperformance, mainly thanks to government bonds from Italy, Finland and the Netherlands, in addition to its mortgage investments.
It indicated that the result of its matching portfolio included a 0.7% loss on its interest and inflation hedge.
The return portfolio generated a 14.3% return, with equity (18.1%) and property (16.4%) the best performing asset classes.
High-yield credit delivered 4%.
However, the Philips Pensioenfonds lost 13.6% on emerging market bonds.
It attributed the outcome to the choice of countries in combination with local currency mandates.
It also reported a 13.1% loss on commodities.
According to the scheme, the 1.6% outperformance of its return portfolio was due largely to active management of emerging market equities, property and global tactical asset allocation (GTAA).
It also made clear that it further reduced its direct property holdings – for example, by selling Symphony office tower in Amsterdam – while increasing its portfolio of indirect non-listed property to €248m, almost 50% of its target.
The pension fund reported a 4.4% investment result over the first quarter of 2014, with its matching and return portfolios producing 5.8% and 1.2%, respectively.
During this period, its coverage rose from 108% to 113%.
However, 3 percentage points of this was due to a one-off contribution of €600m from the employer, following the scheme’s switch to collective defined contribution arrangements with an average-salary target.