Last March, Pensioenfonds Openbare Apothekers was the first pension fund in the Netherlands to announce a preliminary choice for the so-called flexible arrangement. Under this variation of the new defined contribution pension system, participants will have personal pension pots and the ability to choose their own risk profile. The move to individual DC with certain group features, which the pharmacists’ pension fund intends to implement from 1 January 2024, has potentially significant implications for the fund’s investment strategy.
In anticipation of the transition to the new pension contract, Apothekers has frozen its investment strategy for the time being, says Ronald Heijn, administrator of the fund and chairman of its investment committee. “If you want to transition quickly, you need to free up capacity for that. As a result, we have decided to halt all further internal development as much as possible. This also concerns our investment policy, which we have frozen until the transition is complete,” says Heijn.
“Any changes to the mix of investments would be implemented in accordance with current investment policy and as such would have an investment horizon of less than two years,” says Maarten Thomassen, who advises Apothekers on its policy. investment on behalf of Aon. He adds: “Even if you expect a change to prove profitable, you are unlikely to recover the associated costs in such a short time.”
An additional reason not to make asset allocation changes now is that the fund expects the mix of investments to be reorganized following the transition to DC. “We can increase risk in the new system because we no longer have to protect our funded ratio. As a result, we will have more freedom to design our counterparty portfolio, for example by including additional inflation hedges,” says Thomassen.
The equity allocation, which currently accounts for 25% of the fund’s €2bn assets, is also expected to increase. Heijn says, “Members have indicated in surveys in the past that they would like to increase risk. This year we also conducted a risk appetite survey among our members and we expect the results soon. Based on these, we can proceed with the design of the life cycles, from which our members will be able to choose in the new pension system,” says Heijn. The concepts of the life cycles will be voted on by the members of the professional association of the pension fund in June.
Apothekers is one of many occupational pension funds in the Netherlands. For this type of scheme, members collectively decide which scheme to opt into the new pension system. While the maritime pilots’ fund, Loodsen, and the medical specialists’ fund, SPMS, had opted earlier for the solidarity scheme with more collective characteristics, the members of the professional association of Apothecaries expressed their preference for the flexible scheme. In contrast, for sectoral schemes such as the ABP and the PFZW, the social partners decide whether to switch to the new pension system. They also choose the DC type of arrangement, flexible or solidarity, under the new system.
Lower interest rate hedge
Apothekers reduced its interest rate hedge from 42% to 32% earlier this year on anticipation of another rise in interest rates. “Scenarios emanating from our latest ALM study in December last year indeed suggested that interest rates would rise further. Lowering your interest rate is then the best way to increase your funding ratio,” says Ronald Heijn, chairman of the investment committee. “That’s why we decided to use our limited risk budget for this purpose.” This decision contributed to the rise in the fund’s funding ratio from 104.1% at the start of the year to 108.6% at the end of March.
Heijn and Thomassen note that the diverse membership of the fund makes the flexible arrangement a natural fit for apothecaries. “Our older members and retirees work or tended to work as self-employed and have accumulated considerable pension capital,” says Heijn. “The average pension pot for current retirees is around €800,000 to €900,000,” he adds.
“We can increase risk in the new system as we no longer have to protect our funding ratio…we will have more freedom to design our counterparty portfolio, for example by including additional inflation hedges”
Younger members, on the other hand, tend to work under contract and have lower incomes. “These young pharmacists also indicated a preference for green and sustainable investments. If they also want to take less risk, it is possible to design a specific separate investment policy tailored to their needs,” says Heijn. Under the solidarity scheme, all retirement assets continue to be managed collectively and, as such, make such a scheme impossible. “The flexible arrangement, on the other hand, gives us the opportunity to offer different investment proposals that reflect the heterogeneity of our members,” he concludes.
Flexibility is also in the interests of older members, says Heijn, as many retirees want to continue investing in stocks past retirement age. He adds: “They have a relatively higher preference for risk compared to the average retiree. This is partly because they not only depend on their pension for their retirement income, but also have savings or additional assets such as real estate. This opens up the possibility for the fund to also invest more in illiquid assets, such as mortgages or private loans.
Currently, Apothekers has limited exposure to alternatives and all assets in the fund have daily liquidity. Its alternative portfolio is made up of a mandate of 31 hedge funds managed by black rock. “This mandate covers a wide range of hedge fund strategies, from relative value to low volatility, and has a low correlation to equity markets,” according to Heijn. The return objective of the mandate is 4% per year, with a target volatility between 4% and 5%.
While pension fund members have a clear preference for the more individual variant of the two contract types of the Dutch pension reform, they also attach importance to maintaining several collective elements, according to Heijn. Consequently, the obligation for sectoral schemes and professional funds which opt for the flexible contract to include a “risk-sharing cushion” in their pension scheme, which was added to the last draft of the new law on retreats, is no problem for apothecaries. However, it is not yet clear what form the risk-sharing cushion will ultimately take.
Like most Dutch pension funds, Apothekers mainly invests passively in equities. Apothekers transferred its passive equity mandate from Dutch asset manager Actiam to BlackRock last year due to “continuity risk” at the former, according to Heijn. “Our own risk assessment suggested that Actiam had no future as an independent business. We have seen this by looking at things like profitability trends, staff turnover and limited asset growth,” he adds. At that time, Apothekers had invested more than 15% of its assets with Actiam.
Heijn continues: “We knew something was going to happen to the company, but we didn’t want to wait because we felt the risk of continuity was too high. So we looked at how we could switch to another supplier at the lowest possible cost. »
Eventually, BlackRock was chosen as the new manager for the mandate. According to Heijn, the switch from Actiam, which was acquired by Cardano in October last year, also resulted in a modest management fee reduction of 1.2 bps.
Pension funds can increase risk in the DC system
After the transition to a DC system, pension funds will no longer need to maintain large buffers. The strict financial assessment framework that discourages pension funds from taking excessive investment and liquidity risk will also no longer apply to pension funds that choose to make the transition.
All of this means that pension funds will, in principle, have more freedom to design their investment strategy as they see fit, not least because a large proportion of pension funds, including Pensioenfonds Openbare Apothekers, are currently in ” reprise “. This means that their funding levels are below the minimum required by pension regulator De Nederlandsche Bank (DNB). Therefore, the maximum level of risk that many pension funds can take is currently limited.
Some pension funds will no doubt take advantage of this to increase risk once regulatory restrictions are lifted. However, the relaxation of financial regulations is replaced by a new obligation: under the new rules, funds are required to first measure the risk appetite of their members, and design their asset allocation and investment strategy accordingly. In other words, pension funds can increase risk after pension transition, but it is up to their members whether they do so.
“We are currently investigating ways to increase ESG profile of the wallet but we won’t take any decisions on this matter until after we will have determined the life cycles in the new contract”
The only actively managed portion of Apothekers’ equity portfolio is a €120 million European equity mandate with Acadian. Since last year, part of this portfolio has been invested in companies that show a strong improvement on ESG criteria.
“We have agreed with Acadian to have an overweight of at least 10% in this type of company compared to the benchmark index. For example, investments in renewable energy companies must be 10% above the benchmark exposure,” says Heijn. Acadian will also reduce the CO2 intensity of its portfolio by 50%.
Apothekers’ ambition is to further increase the ESG profile of its portfolio, as member surveys have repeatedly shown support. “We are currently looking at ways to increase the ESG profile of the portfolio, but we will not make any decision on this until we have determined the life cycles in the new contract,” says Heijn.
Apothekers’ bond portfolio is fully actively managed. The fixed income mandate is shared equally between BlackRock and Pimco. “We opted for two managers with different styles for diversification purposes. Pimco is more of a top-down macro manager ready to make strong calls, while BlackRock is more of a relative value manager staying close to the benchmark,” says Heijn, who took into account that Pimco has made significantly better performance. than BlackRock over the years. This brought the question to the fund’s board of perhaps changing the fixed income allocation in favor of the former. “But this question will only be asked after the transition of pensions.”