The €17bn pension fund of Dutch technology company Philips has warned of an expected funding shortfall, due to the combined effects of a riskier investment mix, low interest rates and stricter accounting rules within the new financial assessment framework (FTK).
Despite generating a 4% return over the last quarter, the scheme saw its funding fall by 4 percentage points to 113% in September, following further drops in interest rates, which are used for discounting liabilities.
The scheme’s required funding level increased from 107% to 109%, and the pension fund said it expected further increases once it completed the restructuring of its portfolio.
It also said it expected that the stricter rules of the new FTK – which will come into force on 1 January 2015 – would lead to an additional increase in the required funding, which could rise to 117%, it said.
The Philips scheme has, therefore, ruled out the possibility of indexation next year.
Earlier this year, the pension fund announced that it would reduce its matching portfolio from 70% to 60% in favour of its return portfolio.
Its new strategic liabilities portfolio is now 35% euro-denominated government bonds, with allocations of 5% each for global government paper (including UK and US bonds), global credit, mortgages, high-yield credit and emerging market debt.
The Philips scheme’s new strategic allocation in the return portfolio consists of holdings in equity (28%), property (10%), commodities (1%) and cash (1%).
Last summer, the pension fund’s matching portfolio was 62.5% euro-denominated bonds and 15% global bonds, credit and mortgages.
The Philips scheme fell 0.2 percentage points short of its benchmark with its quarterly return.
It attributed the underperformance to the fact it failed to adjust the benchmark on a daily basis when rebuilding its investment portfolio.
It also pointed out that the combined effect of its interest and inflation hedges had shaved 0.1% from the previous quarter’s return.
The pension fund did not provide specific return figures for the individual asset classes, saying only that its commodity investments produced a loss.
Philips Pensioenfonds has 102,640 participants in total, of which 57,320 are pensioners and 14,175 are active members.