Financial position

One of the factors used to determine the financial position of Philips Pensioenfonds is its funding ratio. If a pension fund has a funding ratio of 100%, this means that its assets exactly cover its existing pension liabilities. A series of financial rules laid down in the Financial Assessment Framework (Financieel Toetsingskader) have been used to define the following types of funding ratios:

Current funding ratio
 

The current funding ratio reflects the value of the pension fund’s assets as a proportion of the pension liabilities (all pensions payable now and in the future).

At 31 December 2022, Philips Pensioenfonds had a actual funding ratio of 128.8%. 

Policy funding ratio
 

Another way of calculating the funding ratio that is less subject to daily fluctuations is the policy funding ratio. The policy funding ratio is calculated by taking the average of the actual funding ratios over the past twelve months. By law, pension funds are required to use their policy funding ratio for deciding on various matters, for example indexation. The policy funding ratio is also used for other purposes, including to establish whether the pension fund’s buffers are sufficient.

At 31 December 2022, Philips Pensioenfonds had a policy funding ratio of 128.8%.

Required funding ratio
 

The required funding ratio is the minimum policy funding ratio that pension funds are required to have according to the law. If a pension fund’s policy funding ratio is at the same level as the required funding ratio, this means that it has the financial buffer required by law. The purpose of this buffer is to compensate for fluctuations in the value of the pension fund’s investments and liabilities. The required funding ratio varies from one pension fund to the next, and is determined largely by the pension fund’s investment policy: the higher the risks in the investment policy, the higher the required funding ratio.

At 31 December 2022, Philips Pensioenfonds had a required funding ratio of 115.4%.

Latest developments

In the fourth quarter of 2022, the current funding ratio decreased from 129.5% at the end of September to 128.8% at the end of December. This fall in the current funding ratio was caused by the fact that the value of the Fund's assets fell more than the pension liabilities. Below is an explanation of the developments in the fourth quarter.

Decrease in pension obligations
Interest rates rose slightly in the fourth quarter. At a higher interest rate, the pension obligations of the Pension Fund decrease. That is favorable for the funding ratio. However, the decrease in pension liabilities was limited as the periodic adjustment of our accounting policies, including life expectancy, has been incorporated into the Fund's pension liabilities in the fourth quarter. The increased life expectancy means that pensions have to be paid out for longer on average, which means that pension liabilities are rising. On balance, there was a slight decrease in pension liabilities.

Fall in pension assets
The fixed-income securities portfolio performed negatively in the fourth quarter due to the rise in interest rates. The return on the investment portfolio was also negative. This was due to a decrease in the value of the real estate portfolio. The return on the equity portfolio was slightly positive.
The returns of these portfolios are expressed in euros. Philips Pensioenfonds invests in many different countries. Currency effects therefore play a role in the formation of returns. An important trend in the fourth quarter was the appreciation of the euro. As a result, many foreign currencies fell in value against the euro. Philips Pensioenfonds hedges the currency risk of many investments. The return on this hedge was strongly positive in the fourth quarter of last year.

However, this strong positive return on currency hedging could not offset the total loss on the fixed income and equities portfolio, resulting in a negative total investment return for the fourth quarter and a decline in pension assets.

(1) The pension assets represent the size of the Pension Fund's financial resources. There is a difference between the pension assets and the invested assets. This difference consists of a number of items (including taxes to be paid and social insurance contributions) that are or are not included in the pension assets on the one hand and the invested assets on the other. The funding ratio is based on the pension assets.