The precarious seesaw that is pension fund asset-liability management is demonstrated in the latest results of the giant Dutch pension fund, ABP, with the fund’s coverage ratio falling, despite positive investment returns, and the fund being only slighly ahead of its recovery schedule.
In the first six months of this year the fund’s pension liabilities rose €28 billion due to a historically low interest rate level of 3.2 per cent, compared to 3.9 per cent for 2009. The fund now has €218 billion ($282 billion) in capital.
This means that for the fund’s recovery plan, ABP is only slightly ahead of schedule, and a higher level of funds will need to be set aside to pay future payments.
In March 2009 the fund submitted a recovery plan to De Nederlandsche Bank, when a drop in the actuarial interest rate at the end of 2008 to 3.6 per cent, and a return on investments for the year of -20.2 per cent meant the fund’s coverage ratio had fallen to 90 per cent.
At the end of 2007, the fund had a coverage ratio of 140 per cent; with an actuarial interest rate of 4.9 per cent and a return on investments of 3.8 per cent. Once the coverage ratio falls below 105 per cent the fund is required to report to the Bank on its plan to eliminate the underfunding within three years, and that the value of the assets will be on the level specified by the Pensions Act within 15 years.
The fund has allocated almost 4 per cent more to fixed income in the first half of this year, compared with 2009, with the allocation to real assets being reduced.
Real assets incorporates developed and emerging market equities, real estate, private equity, alternative inflation, opportunity fund, illiquid commodities, and infrastructure.
ABP investment portfolio
| First half of 2010 | 2009 | |||
| Asset class | weight % | return % | weight % | return % |
| Fixed income | 42.3 | 4.1 | 38.7 |
12.7 |
| Treasuries | 10.2 | 3.0 | 9.0 | 5.5 |
| Index Linked Bonds | 8.3 | -0.2 | 8.7 | 11.2 |
| Fixed income credits | 23.8 | 6.3 | 21.0 | 16.1 |
| Real assets | 51.8 | 1.0 | 54.7 | 24.6 |
| Developed market equities | 23.7 | -2.8 | 29.8 | 30.0 |
| Emerging market equities | 6.0 | 9.0 | 5.7 | 74.1 |
| Real estate | 7.9 | 1.7 | 7.5 | 13.2 |
| Private equity | 5.4 | 13.7 | 4.4 | 8.2 |
| Alternative inflation | 4.8 | -4.8 | * | * |
| Opportunity fund | 3.3 | 1.7 | * | * |
| Illiquid commodities * | 0.4 | -1.6 | * | * |
| Infrastructure | 0.3 | 15.2 | -4.8 | -0.1 |
| Other investments | 6.4 | 5.7 | 6.3 | 10.8 |
| Hedge funds* | 4.3 | 8.9 | * | * |
| Global TAA* | 2.1 | 0.0 | * | * |
| Overlay | -0.5 | 1.9 | 0.3 | 0.9 |
| Overlay –duration | 2.6 | 1.9 | 0.8 | -0.4 |
| Overlay – cash and other | -3.1 | 0.1 | -0.5 | 1.3 |
| 100.0 | 4.6 | 100.0 | 20.2 | |
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