SCHIPHOL, Netherlands - The e11.7 billion ($12.7 billion) Dutch pension plan Bedrijfstakpensioenfonds Metalektro, or PME, is searching for managers to run emerging market debt and high-yield mandates together worth e1.2 billion, or about 10% of total assets.
Roland Van Den Brink, PME managing director, said he hopes to appoint managers by July and now is talking with candidates.
The plan, based in the Amsterdam suburb of Schiphol, will allocate about e580 million to each new asset class, but details of the individual mandates were not available. The new portfolios will be funded from reduced exposure to European government bonds.
The plan is also looking to appoint a manager by July to run a socially responsible e100 million European equity mandate.
The search for high-yield credit managers is part of a strategy to invest in non-investment-grade credits and increase returns, said Mr. Van Den Brink. The fund currently has no non-investment-grade investments.
"Government bonds are now yielding between 4% and 5%, and that is too low to cope with the required liabilities. That, and that fact that the timing looks good, is why we decided to invest in non-investment-grade credits," he said.
Plan executives will consider investing in commodities and inflation-linked securities next year, he added.
The PME plan is the seventh largest in the Netherlands and covers 680,000 active and retired workers in the Dutch metal and electro-technical industries.
Roots of change
PME was created in January when the assets of the industrywide plans PMI and SVM were formally merged following an asset liability study completed late last year. Assets of the two plans had been administered and managed along almost identical lines for a year before the merger.
Trustees late last year decided to whittle the exposure to real estate, reshuffle its equity portfolios and marginally increase and diversify fixed-income investments, said Mr. Van Den Brink.
To achieve this, plan executives are:
* Negotiating the terms of the reinsurance contracts that account for 18% of total assets, or 35% of the plan's bond portfolio. "We intend to enhance returns to yields at the higher end of the credit curve," he said;
* Reducing the exposure to European government bonds to 22% of total assets from 36.3% in 2002; and
* Increasing investments in international government and corporate bonds to 8% and 11% of total assets, respectively, from 4.5% and 9% in 2002.
Exposure to equities remained unchanged at 35% of total assets. But plan executives decided to cut exposure to euro-denominated equities by 2.7 percentage points and instead increase allocations to non-euro denominated European equities and North American, Japanese, Pacific ex-Japan and emerging market equities.
The real estate portfolio has been cut to 14% of assets from 15.2% in 2002, and indirect investments have been halved to accommodate a recent rise in the value of the plan's directly held properties.
At the end of last year, the two plans each were 101% funded; it returned -5% for the year.
The return for 2002 could have been -9% but trustees for the two plans decided in early 2002 not to rebalance the portfolios every month, cut equity exposure by five percentage points and launched a program that hedges 100% of the fund's dollar exposure to euros. These measures improved returns by four percentage points, according to Mr. Van Den Brink.
F&C, London, continues to manage the lion's share of the plan's assets in European, Japanese, Pacific Basin and emerging markets equities and European bonds. State Street Global Advisors and Merrill Lynch Investment Managers, both of London, were appointed to manage e900 million and e250 million, respectively, in global equities (Pensions & Investments, Jan. 7, 2002). Vanguard Group, Valley Forge, Pa., manages e540 million in U.S. and European bonds.
Mr. Van Den Brink would not say if he was looking for any other new managers. "We are still in the phase of optimizing our portfolios and looking for the best there is in fund management," he said.
Dutch law now requires that local pension plans maintain reserves to keep the plan 105% funded. With funding at 101%, Metalektro already presented a recovery plan to the PVK, the Dutch pensions regulator.
In order to reach 105% funding by the end of this year, member premiums have been increased to 15.6% of salary from 13% in 2002. Mr. Van Den Brink hopes revisions in the asset mix will further improve the plan's finances. He would give no further details of the recovery plan.
In order to make the plan more sustainable, the plan has switched to calculating future benefits according to a member's average salary from previously calculating benefits based on final salary. Benefits already earned will remain based on final salary.