The Dutch Railway Pension Fund is one of the oldest in Europe, dating from 1845.
The fund is managed by SPF Beheer, a wholly owned subsidiary of the Dutch Railway Pension Fund. At the end of 2003 SPF Beheer had assets under management of some E11bn, of which E9.3bn is dedicated to the Railway Pension Fund. SPF Beheer also manages the Dutch Public Transport Pension Fund.
The Railway Pension Fund has a total membership of 67,000 and the Dutch Public Transport Pension fund has a total membership of 28,000.
In accordance with other funds, the underlying philosophy at SPF Beheer is to optimise the risk return ratio, taking into account the liabilities.
As for the asset allocation, the Dutch Railway Pension Fund invests almost 50% in equities. “The Dutch Railway Pension Fund has a higher allocation to equities than other pension funds because the fund has a adequate coverage ratio, 160% based on the 4% discount rate,” says Marcel Andringa, head of investment strategy at SPF Beheer.
The allocation has changed somewhat over the years. In 1999, 54% of the fund was invested in equities, 36% in fixed income and the remainder in real estate. This differs from 47.5% invested in equities today. “One of the reasons is that the fund started to invest in private equity a few years ago. The fund has a long-term target allocation of 5%.”
The move to the market valuation of liabilities is challenging pension funds across the country. “At the moment we study the necessary measures to reach a better liability match,” says Andringa.
So what does he perceive to be the main challenges here? Andringa says: “When you look at the new rules of the PVK, including the solvency test with a one-year horizon, it is important to get the right balance between the short and the long run. For example, you don’t want to get into a situation where the solvency is so low that you have to sell some investments.”
Over the last few years the Dutch Railway Pension Fund has shunted an increasing proportion of the fund assets into international investments as it, like other Dutch funds, has sought to reduce its exposure to the local market.
Within the equity allocation the fund has shifted from Europe to the US. At the moment 50% of the equities portfolio is invested in Europe, 37% in the US, 8% in Japan and 5% in emerging markets. There are also plans afoot to increase the exposure to emerging markets.
In the bond portfolio the fund was a forerunner in terms of exposure to corporate debt, with 30% of the total bond allocation by 1999. Last year the fund started investing in high yield and emerging market debt.
The main line running through all these strategies is the need to diversify with a view to achieving a better risk-return profile. “The focus is to get a better absolute return,” says Andringa.
He has clear views about the importance of the ALM study. “Our ALM studies have a 20 to 30-year horizon, but in the meantime a lot of things can happen. It is important to monitor the developments closely and establish a strategic asset mix for the next three to five years.”
SPF Beheer carries out an ALM study every year for both pension funds, more frequently than most other funds. “The environment changes very rapidly,” says Andringa. “Also, every year you can build on the last ALM study.”
SPF Beheer prefers to do much of its asset management in house, which bucks the national trend. “Investment costs are much lower, while the results are quite good. Because of specific knowledge required we can’t do everything in house; emerging markets, high yield bonds and Japanese equities are examples of investments which are managed externally.”
Style diversification is another feature of the investment strategy. “But we don’t like to use too many different styles,” says Andringa. “Some style diversification works very well for a portfolio, but if you have a lot of different managers you end up with an index portfolio with very high costs. At the moment we are looking to implement an absolute return style.”
SPF Beheer does not make use of the core satellite approach. “The approach works very well when you only have external managers,” says Andringa. “But because we manage the majority in-house and our internal management costs are quite low, we believe that we can replicate the combination of passive management and external active management, in- house but at a lower cost. We try to manage those portfolios with some intentional active risk. This way our expected Sharpe ratio, corrected for management costs is as high as possible.”


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