Holdings in government bonds and inflation and interest swaps were PFZW’s best-performing portfolio in 2014, returning more than 43% and outperforming its benchmark by 1 percentage point.

In its annual report, the €178bn healthcare pension fund cited the impact of falling interest rates and narrowing interest spreads in Europe.

Closing the year with an official funding ratio of 108%, PFZW said it would be unable to grant any cost-of-living-allowance.

As a result, indexation in arrears increased to 12.9%.

It said ongoing uncertainty in the financial markets, combined with the scheme’s financial position, made it “uncertain” whether it could achieve its long-term targets.

“The search for yield has caused high valuations of investments worldwide, and as such, low expected returns,’’ it said.

Peter Borgdorff, director at PFZW, said the fund had raised the issue of the impact of lower bond yields on pension funds as a result of the European Central Bank’s (ECB) quantitative easing programme.

“We expressed our worries to the DNB member of the ECB, Klaas Knot,” Borgdorff said.

“He said he had done everything he could to change the policy of the ECB because of the consequences for pension funds and insurance companies in the Netherlands, but they did not listen.

“We are a small country compared with the rest of Europe, but the consequences are that it is bad for pension funds and insurance companies.”

In its 2014 annual report, the pension fund posted an overall return of 15.5% and attributed a 0.2-percentage-point outperformance to the performance of government bonds, swaps and infrastructure.

The latter returned 12.4% for PFZW, outperforming its benchmark by 6.2 percentage points.

Public real estate also performed well, returning 17.9%, driven by the recovery of the US property market and a reduction in financing costs in the wake of falling interest rates.

Its 32.8% equity holdings returned 10.5%, while its 5.6% private equity allocation produced 12.3%.

High yield and emerging market debt returned 4.8%, an underperformance of 0.5 percentage points the pension fund attributed to “poorly performing investments in Russia and Venezuela, as well as disappointing returns in the energy sector’’.

The healthcare scheme lost 37.7% on its 4% commodities allocation due to the falling prices of most commodities, including oil’.

It said it limited the loss on commodities by reducing the strategic allocation and adjusting the composition of the portfolio in the second half of the year.

In 2014, the pension fund began divesting its holdings in hedge funds after concluding the asset class produced “insufficient and uncertain” returns, offered “limited options” for sustainability and incurred high costs.

As of the end of 2014, it had reduced its allocation from 2.7% to 0.4%, after generating a return of 6% against costs of €73m.

PFZW reported Q1 results in mid-April, returning 9.3% over the period.

However, it saw its coverage drop 4 percentage points to 104%.

The scheme said only its commodities portfolio incurred a negative return of 8.6% triggered by oil market volatility.

It added that the negative performance of its currency cover caused a 0.3% loss, on balance, on its combined hedging policy.

For 2014, PFZW reported total costs for asset management and transactions of 0.54% and 0.07% of assets, respectively, and spent €73 per participant on administration.

To achieve its indexation target, it left its risk profile unchanged following the introduction of the new financial assessment framework (nFTK), which prescribes stricter rules for funding and inflation compensation.

PFZW raised its allocation to short government bonds at the expense of liquid equity to compensate for increased risk as a result of rising liabilities and falling interest rates.

Previously, it decided not to increase its strategic interest hedge of 46% in sync with rising liabilities.

It said it had nominally covered “much less than 46%’’ at year-end, adding that it hedged approximately 6% of its inflation risk.

It added that it reduced its currency hedge of the US dollar to 70% last year.

The healthcare pension fund has more than 2.5m participants in total, affiliated with 22,400 employers.

For more on PFZW, look out for How We Run Our Money in the June edition of IPE magazine

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