Considerable media attention has been devoted in recent weeks to the affordability of pensions, with PGGM being one of the pension funds mentioned in this respect. PGGM considers it important, therefore, to explain its contributions and investment policies and the underlying assumptions on which these are based.
Managing affordable certainty
Pension risks are future risks since commitments to pay pensions extend far into the future. This is why PGGM decided in 1984 to introduce a dynamic contributions policy, which has been integrated with the fundÂ's investment policy since 1995. PGGM conducts regular Asset Liability Management (ALM) studies in order to optimise its investment policy and contributions, with its objective in this respect being to ensure it can continue financing the pension scheme, while maintaining stable, affordable contributions and providing sufficient certainty that pensions will be paid. The way in which the fund is financed is also designed to ensure that pension rights, as far as possible, reflect the cost of living.
Long-term outlook for assumptions
PGGM looks a whole generation ahead when structuring its financing so as to ensure that responsibilities are not shifted inappropriately. PGGM cannot predict the future and so uses a series of models as a means of forecasting returns, wage and salary inflation and the fundÂ's demographic position. The models show the situation in the past and use this as a basis for forecasting the future. This forecast of the future is then compared with expectations in the market and the sector. These expectations are included by the Board of Governors in the information used as the basis for setting structural assumptions for the future. These assumptions are regularly reviewed and are used to determine a structural average level for contributions and the fundÂ's cover ratio.
Annual contributions are partly determined by the fundÂ's existing capital and reflect actual developments in returns, wage and salary inflation and the fundÂ's demographic position. In this way, contributions move in line with the fundÂ's current position. If returns are higher than the long-term average, contributions will fall and vice versa. The fundÂ's objective is to provide sufficient pension certainty in return for affordable contributions remaining stable over time as well as to avoid too much capital being retained unnecessarily.
PGGMÂ's assumptions for the longer term are average wage and salary inflation of 4.8% and an average return of 9%. This return reflects the investment mix that is considered on the basis of the ALM study to be optimally aligned over the longer term with the objectives of the fundÂ's financing policy. This mix comprises 70% equities, private equity, real estate and commodities and 30% fixed-income investments (mainly bonds and government loans). And this is a vital aspect of the fundÂ's financing. The assumptions applied are based on average long-term contributions of around 10% of salary, with a long-term, average cover ratio of between 130 and 135%. The cover ratio at the 2001 year-end was below this average because of wage and salary rises being higher than anticipated and the overall return being substantially lower than assumed, for the second year in succession.
PGGM has announced, therefore, that contributions will rise by 1.5%. This is the maximum annual increase that the fund has chosen to permit itself, given its desire to maintain a stable contributions profile.