EINDHOVEN, The Netherlands - The Philips Electronics N.V. fund has taken rapid strides to adjust to developing trends in capital markets, retirement plan design and demographics.
Under the helm of Managing Director Dick Snijders, the 26 billion guilder ($13.7 billion) fund - which last year was merged into one fund from two - has:
Introduced a career average plan for new employees this year, a sharp departure from traditional final-pay plans;
Dealt with a series of corporate restructurings that has led the ratio of active workers to retirees and deferred vested employees to fall to about one-third from one-half during the past decade;
Matched investments to liabilities in a move that has seen equities jump to 40% of assets from 29% at the end of 1991; and
Created Schootse Poort B.V., its in-house investment management unit that has won money management mandates from five former Philips units and two external clients.
Switch to career-average plan
Philips' adoption of a career-average plan for employees who started working for the company after Jan. 1, has garnered widespread attention in Holland.
While a number of Dutch companies and pension funds are adopting defined contribution vehicles as supplemental retirement vehicles, they generally have stuck with their traditional final-pay retirement plans.
The change to a career-average plan - which provides pension benefits based on an employee's salary equally weighted over his or her career - was made for several reasons, Mr. Snijders explained.
For one thing, the new plan rewards workers who earn additional income from Philips. Unlike the old plan, where only base salaries were included in pensionable earnings, the new plan adds bonuses, performance-related pay and shift pay in determining benefit levels.
Also important is that a career-average plan recognizes the changing nature of the labor trends. The new plan better suits the rise of dual-career couples and increasing mobility of the workforce, so workers can accrue benefits evenly throughout their careers.
What's more, workers may not necessarily earn their top pay in the last few years before retirement, Mr. Snijders said. The career-average plan gives equal weight to earnings made at the peak of one's career.
From Philips' perspective, the new plan provides far more controllable costs; final-pay plans are more subject to swings in pay in the last few years of a worker's career.
As far as employer costs go, the new plan costs about the same. Philips' total pension costs have remained constant, around 300 million to 400 million guilders a year, although the company is enjoying a holiday from contributions.
Workers are allowed - but not required - to contribute to the new plan; existing employees must chip into the existing plan. (Existing employees may transfer into the new plan.)
Philips officials rejected the idea of going to a defined contribution plan, although the company has adopted a defined contribution plan for its U.K. subsidiary and is studying the issue for a number of other overseas subsidiaries.
Mr. Snijders said adoption of a defined contribution plan would have been viewed as "a bridge too far" by many in the Dutch market.
Changing liability structure
Philips pension executives also have had to wrestle with the fund's maturing liability profile. A series of corporate restructurings in the past eight years have led to a shrinking number of active workers, and a growing number of retirees.
At the end of 1991, Philips had 64,865 active plan participants. Five years later, that figure had plunged 22.1%, to 50,549. (Only about 42,000 of those participants still work at Philips; the others accrue benefits in the Philips plan but their units have been spun off.)
Meanwhile, the number of retirees had grown 15.7%, to 50,539 from 43,675. (The number of deferred vested employees held steady, around 38,000.)
More sales and closings of unprofitable units are expected to further reduce the number of active workers. Philips recorded a loss of 590 million guilders last year, when restructuring and other extraordinary charges totaled 2.57 billion guilders. In contrast, the company showed a net profit of 652 million guilders in 1995.
But adoption of asset/liability modeling in 1993 has led officials at Philips Pensioenfonds to increase overall equity exposure. This was aided by the fund's growing surplus, worth 134% of its liabilities at year-end 1996. The fund now targets 40% of assets into equities - double its 20% equity exposure in 1987.
The fund now is sitting right at its 40% target, although there's a permissible range of 35% to 45%.
In addition, it has 13% of assets invested in real estate, with a range of 12% to 16% allowed. Fixed-income is at 45%, in the middle of its range of 36% to 52%. The remaining 2% is invested in cash.
Given the small size of the Dutch equity market, 60% to 65% of equities are invested abroad on an unhedged basis.
The Philips fund outsources 15% to 20% of its total equity assets, mostly for distant mandates or specialized areas such as U.S. small-cap stocks. Mr. Snijders declined to reveal the names of the 10 to 15 managers used.
In contrast, 85% of fixed-income exposure is invested domestically; the international portion is fully hedged. As for real estate, 10% to 15% is invested overseas, mainly in the U.S. market.
Money management unit
The pension fund's top-down approach, based on market fundamentals and using dividend discount models, has generated strong performance.
For the five years ended Dec. 31, the fund returned 11.6% on a compound-annualized basis; it returned 16% last year alone. While official performance universe is not yet available, those figures are believed to beat the universe of Dutch pension funds.
Philips formed Schootse Poort, its internal money management arm, in 1990. The unit continued to provide pension fund services to five companies spun off from Philips.
Also key is that Schootse Poort offers administration so clients can get a bundled service.
Since that time, the manager has picked up balanced accounts from two unaffiliated funds: Stichting Pensioenfonds P&C Groep, Zoetermeer, and Stichting Pensioenfonds VCBV, Born.
Mr. Snijders, who also serves as president of Schootse Port, said the manager is well positioned to offer balanced portfolio management to Dutch funds between 100 million guilders and 1 billion guilders.
The Dutch pension market, he said, is poised to change, with more pressure to have efficient and performance-driven pension fund management.
In addition, the need for automation and improved information systems will make it tougher for smaller pension funds to deliver such services internally, he said.