ABP to up infra investments in new pension system

The Dutch civil service scheme ABP plans to more than double its allocation to infrastructure to 10% by 2030, from 4% now. In the fund’s new investment mix, the strategic allocation to private markets rises from 20% to 30%.

According to Harmen van Wijnen, chair of the executive board, ABP’s shift to illiquid investments follows a trend that private markets take an increasing share of the global economy.

“The number of listed companies has decreased significantly,” said Van Wijnen.

Most of the increase to private markets will go to infrastructure investments, rising from a 4% strategic allocation now to 10% by 2030. Private equity exposure will increase from 6% to 8%.

The allocation to private real estate will, however, remain unchanged at around 7%, even though the €544bn fund will invest more in Dutch housing.

The exposure to forestry and private loans, both at 1%, also remains unchanged. All the above investments are in the fund’s return portfolio. The allocation to mortgages, which is in the matching portfolio, rises from 1% to 3%.

Equities

The switch to more private market investments will be funded by selling equities and commodities. The strategic exposure to developed and emerging market equities will fall from 33% to 30% by 2030.

ABP will completely phase out its investment in commodities, currently accounting for 5%. These include grains, soy beans and metals; ABP already no longer invests in energy-related commodities such as oil and gas.

The allocation to government bonds will also fall, from 23% to 18%. ABP said it needs fewer govvies to hedge interest rate risk in the new defined contribution (DC) arrangement, and as such it prefers loans that have a better risk-return ratio. Besides the aforementioned mortgages, this also involves credits.

Risk attitude

According to Van Wijnen, the new strategic investment mix follows from three changes regarding the new pension system.

“We have to base our investment policy on the risk attitude of participants; in the new pension system we can increase the exposure of younger members to the return portfolio; and the strict buffer requirements of the current system disappear,” Van Wijnen said.

“In the current system, illiquid investments have a different risk profile than, say, equities. For private investments, we have to keep an extra buffer, leading to higher capital requirements. So we have so far been constrained to invest more in private markets,” he added.

The removal of the buffer requirements allows ABP to assess investments such as infrastructure, private equity, private debt and real estate more on their risk-return characteristics, noted Van Wijnen.

“Compared to equities, private investments have higher return expectations, because of the so-called illiquidity premium. This is not fully offset by the higher risk, according to our analysis. The more so because illiquid investments often also have a more direct relationship with inflation, which is beneficial for our participants,” he added.

Infrastructure

The fund mainly opted for more investments in infrastructure. Van Wijnen said: “We have gained increased experience with this asset class in recent years. The board has a good idea of what returns and risks it can expect. APG has built up its own infrastructure team, which allows ABP to make good infrastructure investments at relatively low cost.”

As an example of infrastructure investment, the president cited the Noordzeker project, in which ABP will build wind turbines at sea together with SSE Renewables.

“But we also invest in French and Asian toll roads, Brussels airport and fibre-optic and electricity networks in the US. The great thing is that infrastructure moves with the time. Currently, data centres are booming and the asset class is growing with them. The same goes for electrification, a big theme in the coming years,” he continued.

Van Wijnen expects energy companies and projects to remain ABP’s biggest infrastructure investments, followed by cable networks, data centres and roads.

The fund will take a partial stake in all projects, such as at Noordzeker, where it is a 50% shareholder. At this wind farm project, the return largely consists of the electricity revenue, which is sold upfront to data centres and companies, among others.

Members have not been asked about their preferences for certain asset classes in the risk preference survey.

“The risk preference survey is about what risk participants are able and willing to bear. As a board, we have translated this into our strategic investment policy. We do survey participants’ preferences around themes and sectors, such as housing, energy and transport. Participants want to know what happens to their money. Infrastructure investments, such as wind farms, are very tangible in that respect,” according to Van Wijnen.

ABP has a preference for infrastructure investments in Europe and North America in particular.

“We do not avoid Asia completely but are more selective there. Energy and water networks, for example, have to be in private hands before you can invest in them. And that is simply more often the case in the US,” Van Wijnen said.

Several pension funds invested in UK water companies such as Thames Water in recent years, losing billions of euros in the process, indicating such investments come with elevated risk.

“We are no longer invested in Thames Water,” Van Wijnen noted, confirming that ABP sold its stake in the troubled water firm in 2022.

“Infrastructure investments are also about diversification,” he added. “There is quite a bit of money in Noordzeker, but not a disproportionate amount. Of course, diversification is no guarantee. But we, as shareholders, are much closer to the governance of projects than is the case for listed companies.”

This article was first published on Pensioen Pro, IPE’s Dutch sister publication. It was translated and adapted for IPE by Tjibbe Hoekstra