Philips Pension Fund realises total return of -5.7% in 2001

Buffers prove their value

In 2001, Philips’ company pension fund in the Netherlands, Philips Pension Fund, realised a total return on its investment portfolio of –5.7%, as stated in the recently published annual report for 2001. The funding ratio (the ratio of the Fund’s total assets to its pension liabilities) at year-end 2001 amounted to 128%. The Fund’s financial position is sound.

For calculating its liabilities, the Philips Pension Fund applies a lower, more conservative actuarial interest rate of 3.41% rather than the rate of 4% that is customary in the Netherlands. Based on an actuarial interest rate of 4%, the funding ratio of the Philips Pension Fund at year-end 2001 would have been 140.

The main reason for the negative result in 2001 is the performance of equities: -17.6%. The fixed-income portfolio and the real estate portfolio compensated for this to some extent with positive returns of 6.5% and 11.0% respectively. The average total return of Dutch pension funds, as measured by The WM Company, was –2.8%. The Philips Pension Fund invests a relatively large proportion of its total assets in equities, an investment category that performed poorly in 2001. Because of the Fund’s aim of maintaining the value of its pensions, the Board of Trustees decided to retain a relatively large interest in equities. At year-end 2001, equities accounted for 55% of the Fund’s investment portfolio, fixed-income investments for 31% and real estate for 14%.

The Fund’s return on investments over the last 10 years amounts to 10.2%; the real return (adjusted for inflation), at 7.5%, is clearly above the rate at which the liabilities are discounted. Partly as a result of this, the funding ratio has improved appreciably compared with the situation 10 years ago.

The decrease in the funding ratio in 2001 from 153% to 128% (25 points) was mainly due to the aforementioned negative return on investments (17 points) and to the refund of premiums to the company in 2001 (7 points).

Although the funding ratio is lower than in the previous year, the Philips Pension Fund is in every way financially sound in light of the fact that pensions are also secured by the adjustment policy. The buffers in place proved their value in 2001 in cushioning the effects of negative returns in the short term. The Philips Pension Fund will endeavour to maintain these buffers in the longer term. The Fund’s pension liabilities extend over a long period of time and buffers are necessary to meet the eventuality of negative returns in the short term.

In 2001 the Board of Trustees of the Philips Pension Fund made a start on revising the financing method, as described in the Actuarial and Industrial Statement. The aim is to create a structure under which the relationship between the policy instruments available to the Board (investment policy, indexation policy and premium policy) is more transparent and explicit for the Fund’s stakeholders. In anticipation of a possible modification of the Fund’s Actuarial and Industrial Statement, the Board has, in consultation with Philips, been considering the premium policy for the year 2002. It has been jointly decided not to make any refund of premiums to the company in 2002. The full application of the current ABTN would have resulted in such a refund of premiums to the company.

The Board of Trustees of the Philips Pension Fund has decided to continue the adjustment policy of recent years and has therefore increased current pensions and vested rights by 4.3% with effect from April 1, 2002.

(source: Philips)

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