The €24bn multi-sectoral pension fund PGB increased its mortgage allocation eightfold to €1.2bn last year, representing 5.4% of its entire investment portfolio.

In its annual report for 2016, it said residential mortgages offered better returns than government bonds with a similar duration, while also having limited credit risk. Its mortgage allocation returned 7.6% over the year.

It added that European credit, which returned 4%, had a similar advantage. The profit from both asset classes far offset the higher management costs the scheme incurred, PGB said.

The pension fund, which has 304,000 workers and pensioners in total, posted an overall yield of 10.9%.

Euro-denominated government bonds were the best returning asset class, generating 13.4% due to falling interest rates.

The equity portfolio (40% of total assets) generated 9.9%. The pension fund said it had refocused on passive investments and intended to increase its worldwide factor-based and quantitative mandates.

PGB added that it had further diversified its holdings by investing in alternative credit through corporate loans. Its portfolio (4.2% of total assets) delivered 11.4% during the year.

Infrastructure also performed strongly, gaining 12.2%, while its inflation-linked bonds returned 9.2%. PGB has 3.9% invested in infrastructure and 4.7% in inflation-linked bonds.

The multi-sectoral fund said it would set up a new IT system for administration and communication in an effort to improve its client relations. Its affiliated employers will be offered a new pensions portal, including a dashboard with self-service options.

Last year, PGB spent €163 per participant on administration and paid 0.29% of its assets for asset management.

It attributed the doubling of its transaction costs to 0.12% to an increased number of transactions in the wake of its dynamic policy for hedging its interest rate risk.

Its hedge ranges from 20% when the 30-years swap rate is less than 0.5% to 80% when the swap rate is higher.

According to the pension fund, the surplus return of its dynamic hedge far outstripped the rise in transaction costs. Its interest hedge – largely comprising government bonds – remained less than 40% over the year.

In 2016, PGB also absorbed the pensions of the maritime fishing industry (Zeevisserij), the wholesale sector for flowers and plants (Groothandel Bloemen en Planten), and paper and glass (Papier en Glas). It now serves eight sectors.

At the end of April, the pension fund’s coverage ratio stood at 104.8%.

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