NETHERLANDS - The €14bn Philips pension fund said it has managed to reinforce its financial position, despite disappointing overall returns of 2.6% last year and a drop of its assets by €600m.
The scheme's cover ratio rose by 3% to 137% in 2007, thanks in part to improvements to fixed income interest rates which in turn led to a decrease of its liabilities, combined with positive results on its returns portfolio, according to its annual report.
The recent rise in the strength of the euro against the main currencies, contributed 4.4% to the yield of the return portfolio, thanks to currency risk hedging, the scheme also made clear.
The return portfolio - consisting mainly of equity and property, and containing 40% of the scheme's assets - yielded 8.3%. However, with a negative return of -0.2%, equity fell 80 basis points short of the benchmark, the scheme also stated.
Direct property yielded 17.5%, although this result also included the proceeds of the divestment of a large part of the portfolio, following the board's decision to sell the entire €1bn portfolio.
The pension fund has made it clear two-thirds of the assets were sold by the end of last year, after a fraud scandal was uncovered concerning the earlier sale of the fund's real estate portfolio. (See earlier IPE story: Philips fund ups real estate sale as experts mull liability)
An independent study is being headed by Dick de Beus, former executive chair at healthcare scheme PGGM into those fraudulent transactions at Philips' Real Estate Investment Management (PREIM), and is expected to be completed during the summer, a Philips spokesman said.
The scheme's liability-matching portfolio - mainly consisting of fixed income investments and mortgages, and aimed at covering 75% of the scheme's nominal liabilities - had a negative return of -1%, which fell 40 basis points short of the benchmark.
Meanwhile, the asset manager BlackRock has started implementing changes to the portfolios to improve the risk-return profiles, according to the scheme, although it is not yet able to provide details on those adjustments.
Results of the periodical ALM study forced the pension fund to reduce its interest and equity risks by also divesting part of its equity portfolio. These proceeds have subsequently been used to invest in interest rate derivates, to increase the matching percentage to 87, the scheme reported.
Based on this ALM study, the management board decided to no longer base its investments purely on nominal pension liabilities, but to also include a long-term inflation outlook of 2% on 70% of its nominal liabilities, it added.
The pension fund last year established a pilot portfolio for ethical and social governance (ESG), aimed at the complete policy and implementation cycle.
Furthermore, the scheme succeeded in buying-out approximately 8,000 deferred pensions who were entitled to a yearly benefit of less than €400.
Philips' pension fund has decided to grant workers an indexation of 3.5% this year, while pensioners and deferred participants will receive 1.9%. Last year, the scheme granted an overall indexation of 1.25%.
The scheme has 20,560 active participants, 60,000 pensioners and 41,150 deferred members.
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