PME, the â‚¬18.8 billion (US$25.6 billion) industry-wide pension fund for the mechanical and electrical engineering sector in the Netherlands, has seen its funding ratio fall 45 per cent over the last year. Kristen Paech talks to the fund about its recovery plan, including the decision not to rebalance equities, and the benefits of using a fiduciary manager.
In the past year, Amsterdam-based pension fund has massively rejigged its asset allocation, choosing not to rebalance its equities exposure and increasing its weighting to fixed income by nearly 20 per cent.
The new investment strategy is part of a recovery plan submitted to the regulator, De Nederlandsche Bank (DNB), under which Dutch funds were asked to detail how they would bring their pension fund back up to the minimum statutory funding requirement of 105 per cent within five years.
Like many Dutch funds, PME’s funding ratio has deteriorated on the back of the credit crisis, falling from 135 per cent at the end of 2007 to 90 per cent at the end of 2008; although a decision to hedge against interest rate and inflation risk limited further destruction of the funding ratio, reaping a 9 per cent return in 2008.
Gerda Smits, communications director at PME, says the fund has opted not to rebalance its equities allocation, which has fallen from 38 per cent at the start of 2008 to 20 per cent today.
Fixed income has jumped from 38 per cent to 57 per cent, and the real estate allocation has fallen 1 per cent to 9 per cent. Alternatives remain stable at 11 per cent, and 3 per cent is allocated to ‘other’ investments.
PME’s recovery plan includes a 1 per cent increase in contributions, from 22 to 23 per cent, and no indexation on pension payments in 2009.
These measures are expected to help PME return to full funding within five years, and achieve a cover, or funding, ratio of 114 per cent within 15 years.
“This, of course, depends mostly on the markets,” Smits says. “However, our recovery plan shows we can comfortably recover within the time allowed.”
The road, however, will not be easy. During 2008, PME’s assets fell nearly â‚¬4 billion (US$5.4 billion) from â‚¬22.4 billion at the end of 2007, while liabilities rose from â‚¬16.3 to â‚¬20.6 billion.
Smits says the fund has been monitoring investment performance closely, and maintaining more frequent contact with its fiduciary manager, Mn Services, and its board of trustees.
Fiduciary management has been embraced by Dutch pension funds as a one-stop solution to pension fund management.
Generally, fiduciary managers advise on asset allocation and risk management, while also having responsibility for manager selection, monitoring and tactical asset allocation. Â
PME appointed Mn Services as its fiduciary manager in mid-2007. PME is also a stakeholder in the Rijswijk-based provider of pension administration and investment management services.
At the time, the fund’s investment director Roland van den Brink and four other investment managers moved across to Mn Services, with van den Brink given responsibility for managing the investment management
activities of the provider.
According to Smits, the benefits of a fiduciary manager are that all investment activities are “in one hand of a professional party”. Pension administration is outsourced to Syntrus Achmea but will be transferred to Mn Services in 2010. These two firms are currently in talks about further co-operation.
PME’s executive board consists of labour unions and employers’ organisations in the mechanical and engineering sector.Â The board is supported by a management office, which prepares policy and is responsible for the implementation of pension administration and investment management. Monitoring of investments is done at PME’s office by the manager investments and the controller.
Investments are spread broadly across fixed income, equities, real estate and alternatives. PME’s alternatives allocation includes commodities (especially energy sources such as oil), private equity, hedge funds, infrastructure and a “special products portfolio” which covers investments like forestry and life settlements.
The fixed income portfolio includes significant allocations to euro bonds and world wide company loans, while equities are spread across Europe, the US, Japan and emerging economies such as South Korea, Brazil and Mexico.
When it comes to real estate, the fund invests directly at home in office premises, shops and homes and indirectly abroad in listed real estate equities.
“Real estate is a very local game,” Smits says. “Abroad we therefore work with partners who know their market well.”
In 2009 and beyond, PME will attempt to strike a balance between protectionÂ – ensuring pensions obligations are met – and growthÂ – which is required if the fund is to achieve its target funding ratio.
Commenting on this challenge, Smits says: “PME has to safeguard its assets but still leave room for growth potential.”