Unilever pension fund to increase ESG on back of strong returns
Progress, the €4.6bn Dutch pension fund of Unilever, has said it plans to increase its socially responsible investments due to previous good results.
Following its initial 1% investment in an ESG mandate for best-in-class companies, it decided to extend its ESG policy to high-yield bonds and intensify the application of ESG criteria to its internally managed euro credit portfolio, according to its 2013 annual report.
Last year, the pension fund saw its nominal coverage increase from 133% to 139% – equating to a real funding of 106% – making Progress one of the best performing schemes in the Netherlands.
Its strong financial position allowed it to grant its participants full indexation, including a compensation for the indexation that could not be paid for 2009.
Previously, the pension fund attributed its high funding to the continuous finetuning of its investment and hedging policy, aimed at limiting downside risk.
The Unilever scheme said it made its investment policy partly subject to its real funding.
If the coverage drops, the pension fund will increase its focus on extra returns, while it will aim for taking profits and protection if funding improves.
Last year, it decided to reduce its strategic equity weighting by almost 9% to 30.5%, while raising its strategic fixed income allocation by more than 11% to 50%.
As part of its adjustments – “in order to increase the number of revenue sources” – it reallocated 10% of its equity stake to less volatile risk-based equity, it said.
It also added a 5% allocation to Dutch mortgages at the expense of property and existing fixed income investments.
The pension fund cited the rise of interest rates – causing a reduction of its liabilities – for its improved funding. However, the interest change impacted negatively on its 49.7% fixed income portfolio, which incurred a 1.5% loss.
Moreover, the rise in rates contributed to a loss of 6.2 percentage points due to a 60% interest hedge on liabilities, resulting in a net overall return of 1.9%.
The pension fund returned 18.1% on investments the previous year.
As a response to the loss on its hedge, the pension decided to improve its policy for interest risk and develop a short-term internal risk model that aims to respond to market movements.
With a return of 24.1% – an outperformance of 3 percentage points – equity was the best performing asset class.
Property, commodities and private equity returned 3.9%, 0% and 15%, respectively.
Its board also expressed concerns about ongoing changes to the proposed financial assessment framework (FTK) and protracted regulatory uncertainty.