What risks are there?
Pension accrual and payment are over a very long period of time. From the start of accrual to the last pension payment can be as long as 80 years. During such a period, the world changes which can create risks that threaten your pension. The risks can lead to a shortfall.
Interest rates affect the value of pensions. Pension providers estimate in advance how much money they will need to pay pensions. The lower the interest rate is, the more money Philips Pension Fund needs to have ‘in cash’ to be able to pay out all pensions later. So if interest rates remain low for a long time, it makes pensions expensive.
Philips Pension Fund uses the total pension contribution, less expenses, to finance your annual pension accrual of 1.85%. Is the pension contribution in any year insufficient to finance the 1.85% pension accrual? Then the accrual percentage for that year will be reduced. So you will accrue less pension during a year.
The accrual percentage of 1.85% is therefore not a fixed percentage.
Investment results can also be disappointing. That's why the Philips Pension Fund makes sure the investments are spread over several investment types. Gains on one investment can make up for losses on another. A pension administrator can also hedge investment risks. This does come at a cost.
There are more risks that Philips Pension Fund has to take into account to protect your pension as much as possible. So Philips Pension Fund literally has to ‘manage’ those risks. You can read more about Philips Pension Fund's risk management in our annual report.
Decisions by the General Board on indexation policy are largely based on the pension fund's policy coverage ratio. From 2015, pension administrators must use the so-called policy coverage ratio when making policy decisions. The policy coverage ratio is calculated by averaging the funding ratios over the past 12 months.