Philips Pensioenfonds recently made an adjustment to the investment portfolio within the already existing policy. This adjustment increases the chance of an increase in your pension through indexation, with a slight increase in the level of risk. This adjustment has been made on the basis of our long-term investment policy. Various investment mixes are possible within this investment policy. The policy also provides guidance on changes in the investment mix in different situations on financial markets. This in pursuit of our primary goal: ‘a proper pension’ for all our members. The decision to adjust the investment mix was preceded by a lengthy discussion about the impact of the COVID-19 coronavirus crisis. The conclusion that the Board reached is that it is important - even now – to continue with the long-term-focused policy, but that adjusting the investment mix demands a cautious approach in these uncertain times.
Read on to find out how the pension fund’s strategic investment mix works, why these changes have been made, what role the coronavirus crisis played in the decision, what has changed and how it affects you.
Possibility of adjusting the investment mix
Philips Pensioenfonds holds assets, which are invested. Every investment decision is based on the pension fund’s strategic investment policy. An investment mix represents how the assets are spread across different asset classes (see boxed text). Within the investment policy, Philips Pensioenfonds can adjust the investment mix to ensure that it is always well aligned with the pension fund's long-term goal: ‘a proper pension’ for all our members. We only do this if there are clear indications for this, for example because interest rates are low or because shares are really expensive or cheap.
Asset classes in the Philips Pensioenfonds investment portfolio
- Fixed-income securities, consisting largely of relatively ‘safe’ investments, for example government bonds and corporate bonds with high credit ratings, diversified by being spread across European and non-European securities, plus mortgages. We regard investments in cash as ‘safe’ fixed-income securities as well. Fixed-income securities also cover investments in high-yield corporate bonds and emerging-market government bonds, which have projected yields that are higher than the relatively ‘safe’ investments in fixed-income securities and accordingly carry a slightly higher risk.
- Variable-yield securities, which are all more ‘high-risk’ investments, principally investments in equities (shares) and real estate, which are intended for generating higher returns.
Reasons to shift to more investments with higher projected yields
Based on the investment policy, the pension fund has decided that its portfolio should include more investments with higher projected yields (and that therefore carry a slightly higher risk). At present, equities (shares) are priced attractively, interest rates are low and the economy is at a low level. Given these circumstances, the policy is to hold more investments with higher projected yields.
Sticking to existing policy is important, though the coronavirus crisis demands caution moving forward
Before deciding to adjust the investment mix, ofcourse the Board thought long and hard about whether the coronavirus crisis made it necessary to deviate from the pension fund’s policy and refrain from going through with the adjustment. The Board’s reasoning, based on careful consideration, is that there is no reason to deviate from the existing policy and the investment principles that underlie it. Even if that means that the Board has to make difficult decisions and takes slightly more risk in uncertain times. Although this crisis is causing widespread uncertainty, it also offers opportunities to take positions in securities after their prices have plummeted. Given the prevailing uncertainty, it is important to be extra careful when adjusting the investment mix during a crisis. As such, the pension fund will not carry through the changes all at once, but will spread them over time, depending at all times on how the situation develops.
Reinvesting cash and government bonds to achieve higher returns
As explained above, the pension fund has decided to increase its positions in investments that are expected to generate higher yields (and that therefore carry slightly more risk). This required two changes to our investment mix:
- Reducing our cash investments:
Previously, 7.5% of the assets were invested in cash. We have now reduced our cash position to 1%. This has freed up 6.5% of our assets, which will be invested in other asset classes in which Philips Pensioenfonds already held positions: equities (shares), high-yield corporate bonds and emerging-market government bonds, which are asset classes with higher projected yields. - Shifting the balance within the safest fixed-income securities:
Philips Pensioenfonds had invested 30% of its assets in global government bonds. This position has now been reduced to 25%, freeing up 5% of our assets, which will be reinvested in other asset classes that are similarly relatively ‘safe’ fixed-income securities with higher projected yields than government bonds, namely mortgages and corporate bonds.
Greater likelihood that your pension will be indexed; slight increase in the risk of pension cuts
You are perhaps wondering how this change will affect you. Unfortunately, we cannot say with certainty. Investment yields and developments on the financial markets are impossible to predict, so we cannot give any guarantees. What we can do, however, is run calculations to see the effect of a particular change in terms of additional returns (which can be used for indexation) and risk (the possibility that pensions will need to be cut).
The adjustment is expected to yield an additional return over a longer period of time of around an avarage of €50 million, while the extra risk is slight, and therefore reasonable. Depending on developments in financial markets, obviously that varies from year to year. Over the course of five years, this represents a substantial amount (€250 million) that corresponds to 1.25% indexation on our pensions. For the short term, the funding ratio will be too low for us to be able to grant indexation, or at least full indexation. The additional projected return resulting from the adjusted investment mix will therefore be used first to restore the funding ratio. Restoring the funding ratio to a sufficient level will increase the likelihood that we will be able to index your pension.
The risk can be explained as the possibility that your pension will need to cut at some point during the years ahead if the results are less than expected. That possibility will increase slightly, by less than 1 percentage point. Given the projected additional return and the extra indexation that we expect to be able to grant on your pension, the Board considered this to be an acceptable risk that matches our primary goal of ‘a proper pension’ for all our members.