The Dutch pension fund for workers in the metal industry, PMT, has reduced the weighting of its matching portfolio from 50% to 42.5% to make room for additional investments in real estate and infrastructure debt.

At the same time, the interest rate hedge was increased by 10 percentage points to 60%, according to PMT’s annual report. The €97bn pension fund’s new strategic asset allocation is supposed to have a lower risk profile.

Additionally, the expected ‘surplus return’ – the return on investments on top of the increase in liabilities – is supposed to remain the same at 1.5% a year.

But PMT has now missed this 1.5% goal for three consecutive years. Moreover, it has made a negative surplus return for each of the past three years, resulting in a decrease in its funding ratio.

The average surplus return of the fund amounted to -0.5% over the period 2016-2020, according to PMT. In 2020, the surplus return was at its lowest at -6.1%.

This means the goal to reach a surplus return, which is needed to index pensions, becomes even harder to attain in the long term.

PMT said it keeps failing to reach its surplus return goal because of falling interest rates which result in an increase in liabilities and due to insufficient pension contributions from workers and employers.

“When we formulated the strategic investment policy for 2015-2020 the long-term negative impact of these factors had not been foreseen,” the fund said.

PMT expects the change to its strategic allocation will help achieve its surplus return goal. While the increase in interest rate hedge, which will be executed via interest rate swaps, reduces risk, the share of the return portfolio will be increased to 57.5%.

Matching portfolio 50% 42.5%
Strategic interest rate hedge 50% 60%
Real estate 10% 12.5%
High yield 10% 15%
Equities 30% 30%

Government bonds will be sold and the proceeds are being invested in real estate (+2.5%) and infrastructure debt (+5%).

PMT already announced a first investment in infrastructure debt back in January, but at the time it did not confirm the transaction was part of a reshuffle to its strategic asset allocation.

The fund is increasing its real estate portfolio by adding to existing investments, a process which will take at least two years, according to a spokesperson for PMT. “This is because the investments concern ‘stones’, not listed real estate,” she added.

Higher costs

The surplus return goal was not the only goal that PMT missed last year. It also failed to reach its goal to reduce cost levels compared to 2019. Costs per member increased from €47.87 in 2019 to €77.42 in 2020.

“The cost increase was mostly caused by IT investments which should lead to cost reductions in the long term,” the fund said in its annual report. “The decision to make these investments – resulting in missing the 2020 goal to lower costs – has been taken after careful deliberation.”

Investment management costs also increased in 2020, by 12 basis points to 0.68%, with the figure including transaction costs. The costs increase could almost entirely be explained by an increase in performance fee payments to external asset managers.

PMT paid €265.5m in performance fees, mostly to private equity managers. The fund’s fixed management fees amounted to less than half of this as the scheme mostly invests passively.

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