The Dutch newspaper Het Financieele Dagblad (FD) of 3 May 2002 contains an article on PGGM headlined 'PGGM werkt met riskante premies' ('PGGM works with risky premiums'). This article contains a number of factual inaccuracies. These in turn have resulted in incorrect conclusions concerning the investment and premium policy. PGGM is anxious to explain the correct assumptions with respect to its premium and investment policy.
PGGM uses a model-based approach for the long-term forecasts of returns, wage
and salary inflation and the fundÂ's demographic position. This provides the
basis for assumptions concerning the future, which are then used to determine
structural average levels for the coverage ratio and premiums. The basis for
the forecast return is the PGGM investment mix, which gives the following picture,
(with the FD assumptions shown for purposes of comparison):
|Private equity||7.5%||13.8%||Not included|| |
|TOTAL|| ||9.0%|| ||9.0%|
* the FD article assumes 6% for the ''rest''
The assumptions used in the FD article in respect of the return on the various investment categories and their weight in the mix are factually incorrect.
The risk premium on shares is the extra return over and above bonds. The table indicates that PGGM works with a risk premium of 3.1% instead of the 6.5-7.5% reported by the FD. This risk premium is in line with what other pension funds and investors use. The FD assumes a higher return on equities and a lower return on bonds than the model used by PGGM. On this basis the conclusion that PGGM works with risky premiums is incorrect.
The assumptions for the return in the long term result in an average annual return of 9.0%. This is very much in line with the return that PGGM has achieved in the 31 years since its establishment, namely 9.4% per year.
PGGM is anxious to emphasise that the expected returns need to be set against the pension commitments. With regard to the development of these commitments PGGM works on the basis of prudent assumptions. The PGGM model assumes an average increase in wages and salaries of 4.8%, allowing for a rate of inflation of 3.7%. The model also allows for additional pay increases based on career progression. With regard to pay trends PGGM assumes a moderate development of the real return of 4.2%.
On the basis of the ALM model PGGM reaches the conclusion that it is possible to offer a full pension package at a favourable price even in the very long term.