The Netherland's pension fund for public employees, ABP, published its annual results after a turbulent year revealing a positive return but falling coverage ratio due to low interest rates.
ABP, which is the largest scheme in the Netherlands and in the top three of schemes worldwide, saw its funding ratio rise steadily in the first half of the year from the minimum required 105% (end 2010) to 112% in June 2011. However, in the second half of the year, the debt crisis and the falling interest rate ensured that the funding ratio fell rapidly despite a positive investment return. It ended at 94% by the end of April 2012; 9% below the level required and ensuring measures such as an increase in contributions and a lowering of pension rights had to be announced by the board of trustees.
Positive contribution corporate bonds, equities perform poorly
The value of the scheme's liabilities was €275bn at the end of the financial year, and the assets were valued at €260bn. The €14bn return over the first four months of 2012 just managed to exceed the €12bn increase in the value of the liabilities.
ABP's investment portfolio generated a return of 3.3% (€8bn) over the whole of 2011. Treasury and corporate bonds made a positive contribution (3.4% resp. 6.4%); and real assets, such as real estate, private equity, commodities and infrastructure, also performed positively.
In contrast, the performance of the equity portfolio was negative. Hedging the interest rate risk made a significant positive contribution to the total return.
Euro zone troubles
In order to protect itself from more damage from the euro-zone crisis, ABP moved away from South European countries such as Greece and Italy. The scheme has only €5.6m in investments left in Greece and reduced its exposure to Italian sovereign debt. The total holdings were €7.69bn at the end of 2011 down from €10.3bn the year before.
Lowering pension payouts
Chairman Henk Brouwer said in a statement: 'In 2011, ABP managed to achieve a positive return in uncertain financial markets. The fund was also able to lower its administrative costs. However, these positive developments were unfortunately overshadowed by the deterioration in the fund's financial position in the second half of the year.
"The falling interest rate had an extremely negative impact on the funding ratio. We were unable to increase the pension rights of active members and pensioners in line with average wage changes. In addition, we have had to warn that the pensions may have to be reduced and the temporary contribution increase raised even further."
Whether the announced reduction in the pension will actually go ahead depends on the financial position at the end of this year. To avoid any reduction, ABP's funding ratio will have to pick up substantially in the remaining months of this year, an outlook that is starting to look increasingly unlikely due to the ongoing crisis situation in the euro zone and especially the doubts concerning Greece's future.
Costs
The costs of ABP's asset management (including performance payments), which is carried out by APG, amounted to 0.64% in relation to the invested assets; while in 2010 this figure was 0.70%. The scheme says the lowering of costs was not an aim in itself though as "investment costs must always be considered in relation to the risk and return".
Ethical investing
In their report ABP also stress their desire for a 100% ethical investing policy and mention the exclusion of the American supermarket chain Walmart and the Chinese oil company PetroChina, saying that despite the efforts made to change the behaviour of these companies, they were both still failing to comply with the principles of the United Nations Global Compact, which are the guidelines for ABP. The scheme's interests in these companies have now been sold.
The scheme saw the valuation of the liabilities rise by €38bn in 2011, an increase of almost 17%. This was mainly due to the fall in the interest rate which dropped with 0.8 percentage points to 2.7%.
Up to date financial information on the scheme can be found on the PFO database (subscribers only).
First published 23.05.2012
azeevalkink@wilmington.co.uk
