The Zeist-based e53bn PGGM pension fund – one of Europe’s largest schemes, aims to provide former and current employees in the Dutch healthcare and social work sector with a good pension package at as low a price as possible.

The fund, which has over 1,100 employees and 897,000 active members (2000 figures)seeks to invest employer and employee contributions in such a way that the investments generate optimum returns at acceptable levels of risk. The pension fund invests globally – largely in equities, fixed-interest assets and real estate.

PGGM takes account of the fact that part of an individual’s total pension package is covered by statutory provisions such as the Dutch General Old Age Pension scheme. This part of the overall pension, which is referred to as the ‘contribution-free threshold’, is determined by the pension fund on the basis of the general old age pension for single people.

Two important features of the PGGM pension scheme are that the pension is based on an individual’s average salary over the past two years and the fact that pension rights are adjusted in line with wage and salary developments in the PGGM sector.

PGGM policy is determined by its board of governors, which comprises six representatives of the employers and six of the employees, in addition to an independent chairman. The advisory council, which also has equal representation of employers and employees and includes representatives of pensioner organisations, provides advice to the board of governors.

On the investment side, the fund’s strategic asset mix comes out at 45.5% in equities, 30% in fixed-income, 13% in real estate, 7.5% in private equity and 4% in commodities. The majority of the investment is in the US (40%), followed by Europe (37.5%), the Far East (12.7%) and emerging markets (9.6%).

The fund recently adopted an investment policy that explicitly sought to eliminate certain types of risk while increasing others. The inclusion of commodities in the portfolio saw the fund trying to take advantage of the opportunity to limit both specific and inflation risks. The fund notes that the returns on a commodities portfolio are to some extent positively related to unexpected inflation.

However, the diversification benefit of investing in commodities is seen as more valuable than the categories positive correlation with inflation.

Additionally, market capacity has proved sufficient to absorb PGGM’s investment of around e2bn in the asset class over six months.

In conjunction with the programme of investment in commodities, the fund also recently outsourced an e500m euro cash mandate.

The fund’s investment in commodities, a strategy, which uses derivatives such as total return swaps and futures, means PGGM has to keep a cash position in order to prevent leverage. The cash position has to be equal in size to the total commodities exposure of the derivatives. On a monthly basis, PGGM’s positions are rebalanced to ensure this.

Furthermore, the fund has opted to hedge currency risk – a decision that results in a lower overall risk profile. The remaining risk budget is now used to invest into higher yielding assets like private equity. PGGM says the strategy can result in lower funding costs than a traditional mix of equities, bonds and property.

The move to higher yielding asset classes such as private equity – where the fund now invests more than e4bn – has not posed too many volatility problems for PGGM, which believes that as a long-term investor volatility is not a big problem if spread across a portfolio. The fund says the decision to hedge unprofitable risk with a significant bet on private equity has led to lower funding costs at the same level of risk.

PGGM’s private equity exposure is managed through NIB Capital Private Equity, the Amsterdam-based jointly owned venture arm of PGGM and Dutch civil servants pension scheme, ABP.

Returns on PGGM’s total investment portfolio came out at 3.4% in 2000 and 22.7% in 1999.

A notable addition to PGGM’s investment policy is its stance on social responsibility in investment. PGGM was one of the first Dutch pension funds to define a set of social criteria for its investments in the belief that sustainable investment will, in time, lead to higher profit and thus contribute to an affordable and good pension.

PGGM does not invest in places where returns can be obtained but with adverse environmental consequences. The fund also does not invest in countries where human rights are systematically ignored. The sustainability criteria are applied to all the fund’s share portfolios and will eventually be applied to other investment categories. Earlier this year the fund awarded a e5.5bn sustainable investment mandate signalling its commitment to the area.

The fund also recently outsourced its internal asset management operating systems.

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