Series about investments

Part 3: How does Philips Pensioenfonds establish its investment mix?  

Investment policy is based on the future pension payments

This is the third and final instalment in our series about investments. In the first part, we explained that without investments it is impossible to accrue an affordable pension. In the second part, we described the asset classes in which Philips Pensioenfonds invests. We saw that risk and return go hand in hand: a safe investment in government bonds yields a lower return than a more high-risk investment in equities. In this final article about investments, we explain how Philips Pensioenfonds establishes its investment mix. Philips Pensioenfonds has an obligation to pay out pensions, now and in the future. Our ambition is to raise those pensions every year through indexation, to ensure that your pension retains its purchasing power in the long term. This ambition forms the basis for the pension fund’s investment policy. We use what is commonly known as an ‘ALM analysis’ to identify the investment mix that best suits our ambition. That analysis helps to establish why 30% of our assets are invested in equities, for example, and not 20% or 40%. ALM is short for Asset Liability Management. The ‘assets’ are the investments; the ‘liabilities’ are the current and future pension payments.

Uncertainties mean working with economic future scenarios

As a rule, Philips Pensioenfonds establishes its investment mix for an extended period. ALM analyses generally cover 15 years.Read more

However, even Philips Pensioenfonds cannot say what the world will be like 15 years from now. This means that our investment policy must make allowances for some uncertainties. We do this by using multiple different economic scenarios: positive scenarios, but also, and just as importantly, negative scenarios. Using as many different economic scenarios as possible gives us the best idea of what might happen in the future to the assets that Philips Pensioenfonds has invested. A typical ALM analysis covers an astonishing 2,000 or so different economic scenarios. This allows us to determine how our invested assets will develop over the next 15 years in both good and poor economic conditions. It also shows us what improvements we can make by adjusting our investment mix.


An investment mix that carries more risk will yield greater returns in positive scenarios...

For example, a positive economic scenario might show that equities will yield an average annual return of 5% over the next 15 years, and that interest rates will rise to 3%.Read more

ALM scenarios also allow for inflation, which will rise slowly in positive scenarios. All these factors will make it easier for Philips Pensioenfonds to achieve its ambition. Philips Pensioenfonds can run simulations now to see what the value of its investment portfolio will be in 15 years’ time if a particular investment mix is used, and whether that value will be enough to pay and index its future pensions. If these simulations show that the future assets will not be enough to pay the pensions and raise them through indexation, a relatively larger portion will need to be invested in more high-risk investments such as equities and real estate, which generate higher returns.


…but is more likely to yield losses in more negative scenarios

However, an investment portfolio that yields relatively higher returns automatically carries a higher risk. This is particularly important in negative economic future scenarios.Read more

Although an investment mix with more risk will yield greater returns in positive scenarios, in scenarios where the economy is poor, the assets invested in that mix will lose value more quickly than assets invested in a relatively safer mix.


ALMs are used to find the right balance between risk and return

We use ALM analyses to identify the investment mix that strikes the best balance between the level of returns that we want our investments to yield and the degree of risk that we are willing to run.Read more

As explained above, Philips Pensioenfonds seeks to raise its pensions every year by the same rate as inflation. To achieve this, our investments need to yield returns. This means running risks. However, those risks should not be too high: too much risk can make it unacceptably probable that we will be unable to index our pensions, or might even be forced to cut them, if the economy experiences a downturn. Therefore, Philips Pensioenfonds continually monitors its investments to make sure that they are not exposed to too much risk. In this manner, we hope to identify the investment mix that will help Philips Pensioenfonds to achieve its ambition over a 15-year period.


Part 1: Why does Philips Pensioenfonds make investments?

In the first part of this series on investments, we explained why Philips Pensioenfonds makes investments. Read part 1 of the series.

Part 2: What types of investments does Philips Pensioenfonds make?

In the second part of this series on investments, we explained what type of investments Philips Pensioenfonds make Read part 2 of the series.

Gecontroleerd op: 28-01-2019

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