Employing DAA to Meet Pension Promises      and Improve Investment Decision-Making                       at the           ...
The ABN AMRO Pensionfund Corporate pensionfund of ABN AMRO Bank Separate legal entity, run by a Board of trustees 80,000 a...
Stakeholders and their interests  Pensioners  Funded ratio that enables indexation of benefits in the short term  Actives ...
Annual review of the strategic investment policy   Complex problem :Decisions on the allocation to a nominal matchingportf...
Decision Making Process Strategic Investmentpolicy1.   Board decide on assumptions to be used for ALM studies2.   Broad se...
Excerpt of the decision making table provided to   the board of trusteesCriteria when using annual review of the investmen...
Experiences with this proces since 2007•    Discussion on means and technique separated from discussion on     risk attitu...
Outline of the investment policy  “Safe” matching portfolio to match return on nominal liabilities  Risky portfolio to gen...
Solvency dependent allocation to the return  portfolio (jan 2008 – mar 2009)                                         • All...
Dynamic allocation to the return portfolio comparedto buy and hold and constant weights                         B&H     • ...
Actual funded ratio AAPF compared to hypotheticalfunded ratio with buy & hold and constant weights                        ...
Concluding observations Risk-reward characteristics dynamic asset allocation provide better match with preferences than st...
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Employing DAA to Meet Pension Promises and Improve Investment Decision-Making at the ABN AMRO PensionFund - Presentation: Cees Dert, CEO, ABN AMRO Pensionfund - European Pensions & Investments Summit

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For more information contact: emailus@marcusevans.com

Cees Dert, CEO, ABN AMRO Pensionfund delivered his presentation titled "Employing DAA to Meet Pension Promises and Improve Investment Decision-Making at the ABN AMRO Pensionfund" at the European Pensions and Investments Summit on 15, May 2012.

Join the 2015 Summit along with leading regional pension investors and global asset managers in an intimate environment for a focused discussion of key new drivers shaping institutional investment strategies today.

For more information contact: emailus@marcusevans.com

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Employing DAA to Meet Pension Promises and Improve Investment Decision-Making at the ABN AMRO PensionFund - Presentation: Cees Dert, CEO, ABN AMRO Pensionfund - European Pensions & Investments Summit

  1. 1. Employing DAA to Meet Pension Promises and Improve Investment Decision-Making at the ABN AMRO Pensionfund European Pensions & Investments Summit 2012 Noordwijk, 15 May 2012Based on: Decision making and Solvency based Dynamic Cees DertAsset Allocation at the ABN AMRO Pensionfund, Cees Dert CEO ABN AMRO Pensionfundand Geraldine Leegwater, Journal of Investment Cees.Dert@nl.abnamro.comConsultancy vol. 12 (2), pp 35-41
  2. 2. The ABN AMRO Pensionfund Corporate pensionfund of ABN AMRO Bank Separate legal entity, run by a Board of trustees 80,000 actives, deferreds and pensioners Assets appr. € 12 billion AUM Board are responsible for investment policy Board must choose a policy that reflects a fair trade-off between interests of active participants, deferreds, pensioners and employer Pensionfund 2
  3. 3. Stakeholders and their interests Pensioners Funded ratio that enables indexation of benefits in the short term Actives and deffereds High long term returns to fund/restore full indexation of benefits when they retire Employer Limited risk because employer has to make remedial contributions to restore required funded levels of the fund / high expected returns to reduce NPPC Pensionfund 3
  4. 4. Annual review of the strategic investment policy Complex problem :Decisions on the allocation to a nominal matchingportfolio, a return seeking portfolio, a real matchingportfolio. Also decisions on the use of options and swaptions to reduce downside risk and the use of leverage. Having to take into account long term consequences as well as short term consequences. Level of expertise on investments varies among trustees Simultaneous discussion on (subjective) beliefs on investment outlooks, types of strategy, investment instruments etc. on one hand and and trade-offs on risk and return and interests of stakeholders on the other hand. Pensionfund 4
  5. 5. Decision Making Process Strategic Investmentpolicy1. Board decide on assumptions to be used for ALM studies2. Broad set of efficient policy options is provided to the Investment Advisiory Committee3. Investment Advisory Committee select a set of 10 policy options and declare to the Board that presentation of policies is fair and underlying investment policies are realistic and feasible4. Board select an investment policy implicitly by selecting the set of of risk- reward characteristics that reflects the best trade-off of interests of the stakeholders. The underlying investment policy is revealed only after the choice has been made. Pensionfund 5 5
  6. 6. Excerpt of the decision making table provided to the board of trusteesCriteria when using annual review of the investment Strategy 1 Strategy 2 …………. Strategy 7policyExpected funded ratio after 1 year 107% 109% 110%Lowerbound 95% confidence interval of the funded ratio after 1 year 104% 99% 93%Nett Periodic Pension Costs (mio Euro) 300 240 255Long term potential to index benefits based on consensus forecast 24% 55% 47%of inflationCriteria based on assumption of unchanged policy Strategy 1 Strategy 2 …………. Strategy 7for 15 yearsExpected funded ratio after 15 years 107% 119% 126%Probability of funiding shortage year 1 - 15 39% 27% 21%Average pension contribution as a percentage of salary 31% 31% 33%Average percentage point change in contribution from one year to 5% 6% 8%the next indexation as a percentage of cumulative realized inflationEpected 78% 78% 84%Lowerbound 95% confidence interval of indexation as a percentage 63% 67% 95%of cumulative realzed inflation Pensionfund 6
  7. 7. Experiences with this proces since 2007• Discussion on means and technique separated from discussion on risk attitude and trade-off of interests of stakeholders• Focus on risk-reward trade-offs for stakehoders• Subjective opinions financial markets, investment instruments and types of investment policies banned from the discussion Equal footing between trustees with varying levels of investment expertise Decision results in implicit choice for a coherent, integrated investment policy, in the interest of the stakeholders of the pensionfund Pensionfund 7 7
  8. 8. Outline of the investment policy “Safe” matching portfolio to match return on nominal liabilities Risky portfolio to generate excess returns to fund future indexation No Tactical Asset Allocation Rule based dynamic asset allocation over matching portfolio and return portfolio since January 2007 Annual review to maintain consistency with long term goals Dynamic asset allocation rule provides better match of risk-reward trade-offs with preferences of the trustees than constant mix or buy and hold policies. Pensionfund 8
  9. 9. Solvency dependent allocation to the return portfolio (jan 2008 – mar 2009) • Allocation to return% in RP portfolio depends on funded ratio • Rebalance half of het portfolio if actual weight outside bandwith. 8 times per year at prespecified Funded ratio dates • Limited turnover/transaction costs Pensionfund 9
  10. 10. Dynamic allocation to the return portfolio comparedto buy and hold and constant weights B&H • Difference in allocation after strongly trending CW markets • Low rebalancing frequency and use of bandwith mitigate effect AAPF of DAA in “normal markets” Pensionfund 10
  11. 11. Actual funded ratio AAPF compared to hypotheticalfunded ratio with buy & hold and constant weights • Funded ratio with DAA B&H 10-20 %points higher AAPF than with static mix with same expected return • Difference made in jan CW 2008 – feb 2009 • In alternating markets, DAA could have done worse than static mixes Pensionfund 11
  12. 12. Concluding observations Risk-reward characteristics dynamic asset allocation provide better match with preferences than static allocations DAA better in strongly downtrending markets Time for thorough decision making process Periodic revision to maintain consistency with long term goals Intra-year trend following, annual policy revisions contrarian Unintended market timing? Stick to stated policy Pensionfund 12

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