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2008 연금적립금운용보고서 후생연금 02
 

2008 연금적립금운용보고서 후생연금 02

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    2008 연금적립금운용보고서 후생연금 02 2008 연금적립금운용보고서 후생연금 02 Document Transcript

    • 2008 ABP Annual Report
    • Annual report 2008 ABP
    • Contents Overview 3 Report of the Board of Governors Foreword 8 Core business 10 Reflections on the year 15 Pension fund governance 21 Reports of the Participants’ Council, Employers’ Council and accountability body 28 Financial policy 35 Recovery plan 44 Risk management 49 Pension fund management 59 Investment management 67 Financial statements Consolidated financial statements 84 Notes – general 87 Accounting policies 91 Notes to the consolidated financial statements 99 Other notes 124 Company financial statements 129 Other information Provisions of the Articles concerning profit appropriation 132 Actuarial statement 133 Auditors’ report 135 Management and key representatives 137 Abbreviations and definitions 141 Statistical information on participants 143 One hundred kilometres in under ten hours 17 Ten weeks to reach the summit 27 Nine months on a single painting 43 Six years to get a bonsai ready for sale 57 Forty years to generate clean, sustainable energy 65 One hundred years to create a safe, clean delta 81
    • General
    • 4 Annual Report 2008 ABP Mission Participants and pensioners have the right to a sustainable and dependable pension fund that is able to discharge its financial liabilities now and in the future. Objectives To maintain a sustainable pension system We aim to provide an affordable pension that is attractive to young and old and to participants, pensioners and employers. To spread risk widely We operate pension schemes for all sectors and participants so that they feel comfortable with the fund. We provide flexibility and individual choice within the collective framework. To become a more participant-oriented fund We provide relevant information that really helps our participants make the right pension choices. We focus less on older people in our communications and seek to impress upon younger people the importance of a good pension. We really involve our participants in the ongoing development of the fund. We support employers in discharging their duty of care to their employees by relieving them of or assisting them with certain tasks. To provide more than pensions alone We offer products and services that support active aging, thus promoting continued participation in the labour market. To be a professional organisation We offer consistency of policy, focus on specific target groups (public and education sectors) and good pension fund governance. Organisation Stichting Pensioenfonds ABP was separated from the administrative organisation in 2008. The new ABP organisation is shown schematically below. Committees formed by the Board of Governors Independent bodies Audit Committee (AC) Board of Governors Participants’ Council Fund Policy Committee Employers’ Council Executive Office Investment Policy Committee Accountability body Appeals Committee Investment Committee Internal supervision Remuneration Committee Service (external AC members) agreement APG Algemene Pensioen Groep N.V.
    • 5 Annual Report 2008 ABP The names of the members of the Board of Governors, the committees formed by the Board of Governors, the Participants’ Council and the Employers’ Council are given in the chapter entitled ‘Other information’. The constituent bodies of the Board of Governors are described in the chapter entitled ‘Pension fund governance’. Role of Pension Chamber The content of the pension regulations is determined by the Pension Chamber (Pensioenkamer), in which the employers’ and employees’ organisations are represented by their umbrella organisations. Pension regulations The Board of Governors is responsible for: – determining fundability; – translating it into the pension regulations; – determining the fund’s strategic choices; – managing risk, including internal supervision. The strategic choices encompass inter alia pension policy (pension rights and funding), matching assets and liabilities, investment policy, communication policy and administration policy. Participation in the pension scheme is mandatory for public-sector employees under the Public Servants Superannuation Act (WPA), which affects the relationship between the affiliated employers and ABP. The Act also requires public-sector employers and employ- ees to comply with ABP’s Articles and regulations. It is ABP’s object under its Articles to operate as a sectoral pension fund for the public and education sectors. The Board of Governors oversees the performance of that task, which has largely been outsourced to the administrative organisation. Military personnel participate in the ABP pension scheme pursuant to the Act amending the Military Pensions Framework Act (Kaderwet militaire pensioenen). The reference in the Act to the WPA imposes the above obligation to comply with the Articles and regulations on the Minister of Defence and military personnel. Chapter 4 and chapter 17, paragraph 4, of the ABP pension regulations state explicitly the contributions for which the affiliated employers are liable to ABP and the pensions to which they relate. These chapters also cover the periodicity of contribution payments and the sanctions applied in case of late payment. ABP’s Articles require the fund to operate in accordance with the Actuarial and Business Memo. The Articles also state that the fund’s assets may consist inter alia of those contributions, the available resources and income from investment of the available resources. As regards administration, ABP has entered into a long-term agreement with the admini- strative organisation APG Algemene Pensioen Groep NV (APG). The main tasks performed by the administrative organisation on behalf of the fund are pension fund management, asset management, communication and support services for the Board of Governors.
    • Report of the Board of Governors
    • 8 Annual Report 2008 ABP Foreword 2008, an extraordinary year Stichting Pensioenfonds ABP started the year in a strong financial position. Full indexation was applied to pensions in 2008 and there was scope to make up for indexation missed in previous years. Taking this indexation into account, the funding ratio as at year-end 2007 was 140 per cent, so 2008 started well. By the time of the presentation of ABP’s half-year figures in June, the outlook was less promising. The impact on the financial position of the credit crisis that broke in the summer of 2007 did not become fully apparent until the second half of the year. The entire financial sector was suffering from falling share prices and interest rates and confidence among financial institutions evaporated. The Board of Governors and the administrative organisation constantly monitored and evaluated developments in relation to the fund’s position and took corrective action where necessary. Despite these efforts, ABP’s assets shrank and its liabilities grew – in common with many other pension funds – and the funding ratio declined. ABP’s financial position deteriorated to such an extent that, by the end of the year, the funding ratio had fallen to 90 per cent, below the required minimum of around 105 per cent. In the light of ABP’s financial position and the situation at the end of 2008, the Board of Governors, while fully appreciating the disappointment and concern it would cause to participants and pensio- ners, took the painful decision not to apply indexation to the pensions this year. ABP has now submitted a recovery plan to the regulator, showing how the fund proposes to restore its financial position. The recovery plan also explains how ABP will monitor the recovery process and manage scenarios both better and worse than expected. 2008 was also exceptional in another sense: it was the year in which the ABP pension fund was separated from the administrative organisation. This enables the pension fund to focus fully on its ambition and objectives, while performing its core function of providing a sustainable pension scheme, based on the principles of collectivity and solidarity, which is attractive to all participants and pensioners. The administrative organisation is responsible for pension fund management, asset management, communication and other services, operating under agreements that define the expenses charged and tasks performed. The Board of Governors of the pension fund is, of course, still ultimately responsible. Theme of this annual report: In the midst of the current unrest on the financial markets, driven by sentiment that changes the long-term view from day to day, there is a risk of losing sight of the fact that pension funds take the long- term view because they have long-term liabilities. Participants just entering the labour market and starting to build pension rights will be entitled to a pension that pays out in forty years or so. ABP has to look far ahead in its planning and calculations. ABP takes the same long-term view of the credit crisis. It has to address the problems the crisis is creating and their consequences, including a substantially lower funding ratio and a diminished asset base. Financial markets have experienced crises and extreme volatility in the past that also had an impact on ABP’s position, but the reserves were soon repleni- shed in the years thereafter and under-indexation was made up. Whether that will be the case this time is by no means certain. The familiar warning still applies: ‘Past results give no guarantee of future performance’.
    • 9 Annual Report 2008 ABP The short-term outlook is extremely weak, but improvement in the fund’s financial position depends primarily on the investment results and the interest rate trend in the long term. The global economy is expected to recover eventually, but the pace of that recovery is an unknown factor. The Board of Governors will continue critically to review the principles of financial policy, taking into account the experiences of 2008. The short-term measures have been defined in a recovery plan, but responsibility for the long term goes far beyond that. ABP’s primary object is to provide a good and affordable pension for the participants and maintain the pension system based on the principle of collectivity, with all the benefits that brings. HCJL Borghouts, Interim Chairman of the Board of Governors of ABP
    • 10 Annual Report 2008 ABP Core business Funding ratio The credit crisis hit the fund hard. The funding ratio was severely affected by lower prices sharply lower and significantly lower market interest rates, falling 50 percentage points in 2008 from 140 to 90 per cent. There was a reserves shortfall at the end of the third quarter and a funding shortfall arose in the fourth quarter. The Pensions Act requires the fund to submit a recovery plan showing how it expects to eliminate the reserves shortfall and funding shortfall within the statutory periods. Given the exceptional situation, the Minister of Social Affairs and Employment extended the period allowed for rectification of the funding shortfall to five years. ABP has submitted a recovery plan which meets these requirements to the regulator, the Nederlandsche Bank. Table 1.1 analyses the funding ratio in terms of available resources and liabilities. Table 1.1. ABP’s funding ratio in 2008 (at nominal market interest rate) ABP’s financial position 2008 2007 change (%) Fund capital (in € billion) 172.9 216.5 - 43.6 Pension liabilities (in € billion) 192.9 154.7 38.2 General reserve - 20.0 61.8 - 81.8 Funding ratio (in %) 89.6 140.0 - 50.4 The investment results were far lower than in previous years, with a return of 20 per cent negative in 2008. The fund’s capital decreased to € 173 billion as at year-end 2008 (2007: € 217 billion) and liabilities increased from € 155 billion to € 193 billion, mainly due to the capital market interest rate relevant to the valuation of the liabilities falling from 4.85 to 3.57 per cent. Negative effects The 50.4 percentage point decline in the funding ratio is analysed as follows: - decrease in capital due to investment return: - 27.3 - increase in liabilities due to addition of interest: - 6.2 - increase in liabilities due to indexation: 0.0 - increase in liabilities due to lower capital market interest rate: - 24.8 - other effects: 7.9 - net effect on funding ratio: - 50.4 The other effects relate to contributions, benefits, value transfers and expenses. With a funding ratio of over 100 per cent, capital growth of 1 per cent translates into an increase in funding ratio of more than 1 per cent. Growth in the liabilities has the opposite effect.
    • 11 Annual Report 2008 ABP Market interest rate The liabilities are valued separately from the investments. The valuation of the liabilities is exceptionally low and not based on the expected but not yet realised investment returns, which depend largely volatile on the investment mix. Instead, the valuation is calculated at a nominal market interest rate that matches the maturity of the liabilities. This prudent approach gives more reliable results in normal circumstances. With confidence not yet restored to the market, despite the action by central governments and central banks to limit the consequences of the credit crisis, the market interest rate is low and extremely volatile. Fluctuations in the funding ratio of up to 10 percentage points in one month were witnessed on more than one occasion in 2008. The arithmetic result of the liabilities valuation process should therefore be viewed with some reservation, even though the average interest rate has dropped significantly since October 2008. The volatile course of the funding ratio and the underlying causes are illustrated in the figure below. The black lines show the position at quarter-end. The coloured bars show the factors causing the change in the funding ratio over the period, distinguishing between the effect of interest rates on the liabilities, the effect of the return on the assets and other effects. Figure 1.1 Changes in funding ratio and underlying causes in 2008 150% Q1 Q2 Q3 Q4 Q1-Q4 140% 130% 120% 110% 100% 90% funding ratio 80% investment return interest-rate change interest addition other effects
    • 12 Annual Report 2008 ABP If we calculate the liabilities at a fixed interest rate of 4 per cent, as an example of a prudent long-term interest rate consistent with the maturity of the liabilities, the funding ratio as at year-end 2008 was about 95 per cent (2007: about 125 per cent). This also reflects the effect of the credit crisis, albeit less prominently because, with a notional fixed interest rate, only the falling prices are a factor. No scope for indexation With effect from 1 January 2008, full indexation was applied and the indexation shortfall accumulated in past years was made up. Since then, however, the fund’s financial position has deteriorated to such an extent that the Board of Governors did not consider it appro- priate to apply indexation to benefits and accrued pension rights with effect from 1 January 2009. Current pension benefits The provision for pension liabilities relates to all accrued pension rights, not just those of unchanged pensioners, but also those of active participants and former participants. Despite the low funding ratio, the disbursement of pensions in payment will continue unchanged for the time being and movements in prices and interest rates will have no effect. These factors do, however, affect the funding ratio and hence our progress with the recovery plan. Future indexation will depend on how the funding ratio improves during the recovery phase. If the funding ratio does not improve fast enough and there is no other way for ABP to rectify the funding shortfall within the set period of five years, it may not be possible to avoid curtailment of pension rights in the future. Investment policy The return for 2008 was 20 per cent negative, reducing the average nominal return for the still focused on the period since 1993 to 5.9 per cent as at year-end 2008 (2007: 7.9 per cent). The average long term return for the past ten years has been 2.9 per cent. Apart from necessary short-term corrections, ABP remains firmly committed to the strategic objectives of its investment policy in the long term. The average real return, adjusted for wage inflation, for the period since 1993 declined to 3.7 per cent as at year-end 2008 (2007: 5.8 per cent). To put this in perspective, the contribution rate is set on the basis of a prudent estimate of the long-term real return of 3.0 per cent. 2009 contribution rate In the first half of 2009, the contribution rate for retirement and surviving dependants’ pensions was 20.0 per cent, 0.4 percentage points higher than in 2008. In principle, ABP sets cost-covering contribution rates, which are not raised by reference to an indexation matrix. In other words, contribution rates do not depend on the financial position. The contribution rates for 2009 have been set on the basis of the cost-covering contribution rates at the end of 2008, without taking account of the recovery plan submitted in respect of 2009. To increase ABP’s recovery capacity, the recovery plan provides for this con- tribution rate to be increased during the funding shortfall period by the addition of a recovery surcharge. This recovery surcharge will be 1.0 per cent1 for the second half of 2009. The sector-specific contribution rates for disability pension (AOP) remain at the 2008 level and the average AOP contribution rate stays at 0.5 per cent. 1 The recovery surcharge with effect from 1 July relates to the expected reduction in the early- retirement/flexible pension contribution rate.
    • 13 Annual Report 2008 ABP High service score ABP also measures its performance by the quality of its internal operations. The objective is a high level of service at competitive administration cost. With effect from 2008, the entire administration has been outsourced. ABP measures its performance against those of other leading pension funds, as monitored by the Cost Effectiveness Measurement (CEM) Institute. This benchmark comprises 77 pension funds around the world. Table 1.2 compares the service score obtained by ABP’s pension fund management with the CEM world average. CEM improved the method of calculating the service score in 2008 by basing it on current performance in terms of pension fund management. The service scores for previous years in the table have been restated to facilitate comparison. Table 1.2. Service score compared with CEM world average (max = 100) 2008 2007 2006 2005 2004 ABP 89 88 84 80 77 CEM world average tba 68 70 69 68 The service improved by 1 point to 89 points (max = 100), placing ABP among the highest-scoring pension funds worldwide. The CEM figures for 2008 will not be available until mid-2009. Competitive cost Table 1.3 shows the pension administration expenses per participant compared with the per participant CEM world median (in €) 2008 2007 2006 2005 2004 ABP 90 74 65 63 62 CEM world median tba 79 77 78 85 The pension administration expenses (according to the CEM definition) rose in 2008 to € 90 per participant, due inter alia to higher compliance, communication and ICT expenses. Expenses were also higher in 2008 because pricing under the service agreement with the administrative organisation is at arm’s length. The object is still to keep costs low.
    • 14 Annual Report 2008 ABP Historical review 2008 2007 2006 2005 2004 Financial data (€ million) pension investments 197,408 223,236 208,905 190,215 164,867 insurance investments 2,259 2,228 2,048 - - other assets and liabilities -24,044 -6,651 149 400 3,184 A. Total investments2 175,623 218,813 211,102 190,615 168,051 retirement and surviving dependants’ pensions 189,400 150,844 152,199 150,208 130,740 disability pensions 3 1,993 2,188 2,350 2,521 2,706 flexible pensions 1,402 1,512 1,761 6,434 5,132 ABP ExtraPensioen 133 131 104 78 50 B. Provision for pension liabilities 192,928 154,675 156,414 159,241 138,628 insurance liabilities for own account/risk 2,532 2,102 2,023 - - insurance liabilities for policyholders’ account/risk 213 198 191 - - C. Provision for insurance liabilities 2,745 2,300 2,214 - - D. General reserve (A–B–C) -20,050 61,838 52,474 31,374 29,423 E. Funding ratio of pension fund (A–C)/B (%) 90 140 134 120 121 nominal market interest rate (in %) 3.57 4.85 4.25 3.70 4.20 F. Numbers (at year-end) in active service 1,133,000 1,122,000 1,106,000 1,102,000 1,113,000 former participants 872,000 848,000 816,000 792,000 761,000 pensioners 750,000 742,000 735,000 727,000 697,000 total 2,755,000 2,712,000 2,657,000 2,621,000 2,571,000 affiliated employers/sub-employers 3,985 3,999 4,091 4,187 4,317 employed by ABP (in the Netherlands) 9 2,489 2,387 2,389 2,385 employed by consolidated entities 4,082 778 796 521 490 G. Other information (%) contribution rate for retirement and surviving dependants’ pension (non-military)4 20.0 19.6 19.8 21.4 19.0 disability pension contribution rate (average)5 0.5 0.8 1.2 1.6 1.8 contractual salary increases 4.73 2.05 3.66 0.38 0.15 indexation 0.00 4.056 2.82 0.17 0.12 pension administration expenses per participant (CEM definitions7 in €) 90 74 65 63 62 service score (CEM definition 2008, max = 100) 89 88 84 80 77 Z score (norm: ≥ –1.28 over a 5-year period) -3.1 0.6 1.0 0.4 0.6 return total (= direct + indirect, in %) -20.2 3.8 9.5 12.8 11.5 total return 10-year average (in %) 2.9 6.5 7.3 7.5 7.9 H. Solvency margin for insurance activities8 (%) 242 245 228 - - 2 Presentation changed slightly compared with 2007 5 Until 2007: disability and redeployment benefits contribution rate (high) 3 Until 2007, disability and redeployment benefits only; 6 Including post-indexation since 2007 including ABP disability benefit (AAOP) 7 Except in relation to spreading of project expenses over three years 4 Including general surviving dependants’ pension 8 As from 2008, including Cordares Verzekeringen (ANW) contribution
    • 15 Annual Report 2008 ABP Reflections on the year Overview Financial position Stichting Pensioenfonds ABP (ABP) aims to index the participants’ pensions fully and has deteriorated sustainably at an affordable price. Unfortunately, ABP was unable to fulfil that ambition in 2008. In the wake of the credit crisis that manifested itself strongly from September onwards, ABP’s capital buffers were rapidly depleted and its financial position, which had still been excellent in June, suffered the consequences of the turmoil on the financial markets. Falling prices and interest rates eroded both the assets and the funding ratio. By 31 December 2008, the funding ratio had dropped to 90 per cent, down 50 points on year-end 2007. In the light of ABP’s weakened financial position, the Board of Governors decided not to apply indexation to pensions as from 1 January 2009. ABP has since submitted a recovery plan to the regulator, which is discussed in greater detail in Chapter 6. The recovery plan is expected to eliminate the reserves shortfall within the period of fifteen years required by law. The period allowed for recovery from the funding shortfall has been extended by the Minister of Social Affairs and Employment to five years, which can be met by the recovery plan without additional measures. To increase ABP’s recovery capacity, however, the Board of Governors has decided to apply a recovery surcharge to the (cost-covering) contribution rate during the period allowed for recovery from the funding shortfall. Policy developments Communication given high High priority was given in 2008 to ABP’s communication policy, which complies with the priority requirements of the Pensions Act. The principal objectives of the communication policy are to fulfil the expectations of ABP’s participants and report progress towards the achieve- ment of the pension fund’s mission and objectives. Management activities As well as its normal duties, ABP’s Board of Governors devoted considerable attention in 2008 to pension fund governance, the separation of the ABP pension fund from the administrative organisation and, of course, the credit crisis and its consequences and the pension fund’s (financial) risk management. Pension fund governance New structure for ABP Following separation from the administrative organisation, ABP configured and imple- mented its new structure in 2008, in compliance with the Pensions Act and the principles of good pension fund governance formulated by the Labour Foundation (STAR). The Board of Governors endorses and will comply with the principles of good pension fund gover- nance adopted by STAR in December 2005. The issues relating to the governance of the pension fund which were still open as at year- end 2007 have now been resolved. Separation of pension fund from administrative organisation Separation of pension fund The decision to undertake the restructuring was adopted by ABP’s Board of Governors at the from administrative end of 2007 and the ABP pension fund and the administrative organisation became separate organisation entities with effect from 1 March 2008. This enables ABP to concentrate on achieving its principal ambition and objective: to provide a good, affordable and sustainable pension. With this separation, the ABP pension fund relinquished its self-administered status.
    • A Greek runner, Spyridon Louis, won the first modern Olympic marathon in Athens in 1896. The Olympic marathon was inspired by the legend of the messenger Phidippides, who ran from the town of Marathon to Athens in 490 BC to announce the Athenian victory in the Battle of Marathon. The day of the race in 1896 was very hot and Louis stopped midway for a glass of wine. When told how far the others were ahead, he said he would still overtake them. At 32 kilometres, the leader Lermusiaux (a 1500m runner) dropped out. The lead was taken by the Australian Flack, who had already been victorious in the Olympic 800m and 1500m events. A few kilometres fur- ther, he also retired, giving Louis the lead. In the Olympic stadium, the crowd waited anxiously for news. Cycle messengers were dispatched to the stadium to report the current positions and a police messenger was sent as soon as Louis moved into the lead. When he arrived at the stadium, Louis was met by Crown Prince Con- stantine and Prince George of Greece. Louis finished in 2:58:50, fuelled along the way by wine, milk, beer, Easter eggs and orange juice. His victory was celebrated in an extravagant fashion. After winning the marathon, Louis never ran another race. As well as the Olympic Sta- dium in Athens, many Greek sports clubs are named after this national hero. The marathon has become very popular. There were only seventeen competitors in the first Olympic marathon, but over 38,000 runners took part in the 39th New York marathon in Spy r idon ( SpY roS) loui s 2008. Winner of the first Olympic marathon in 1896.
    • One hundred kilometres in under ten hours Abdelkarim Machichy is a committed long-distance runner. He has already run dozens of marathons in almost every continent of the world and is not scared to take on the challenge of ultra-marathons over distances of 100 kilometres. The last time he did that he recorded a time of 9 hours and 50 minutes. It was around twenty-five years ago that Abdelkarim ran his first marathon, having previously taken part in various eight or ten- kilometre races and several half-marathons. He estimates that he has since completed around seventy marathons in cities such as Beijing, New York, Rotterdam, Amsterdam and Dubai, as well as three in Marrakech in Morocco, his country of birth. He has also run several ultra-marathons, including the Comrades Marathon in South Africa (one year running 89 kilometres downhill and the next year 87 kilometres uphill) and the 100-kilometre Winschoten Run on two occasions, as well as the Haarlemmermeer Run several times and the 70-kilometre run around the island of Texel on three occasions. “My personal best for a marathon is 2 hours and 51 minutes,” as Abdelkarim explains. “I’m not getting any better now, though. That’s because I do too many marathons each year, and also the longer distances, which mean I have to do lots of training. Before you start doing 100-kilometre runs, you first have to spend a few months doing a 70-kilometre run at least once a week. That’s when I go for early-morning runs from Katwijk to Noordwijk, Sassenheim, Hillegom, Heemstede and Haarlem and then back via the boulevard in Zandvoort. That’s 72 kilometres, all on my own as no-one else is mad enough to run such long distances.” Just keep on going During a race, Abdelkarim is far more focused on his body and general condition than on the distance itself, his time or the result. “You never know beforehand how the race is going to go,” he explains. “You train for it and you know you can do it, but you still never know how it’s going to turn out. You always get a dip after 70 to 75 kilometres and then you really start seeing what you’re made of, but you shouldn’t spend time thinking about it. Even the runners leading the race have problems. You just have to keep on going. If you can get through your dip, it will be fine.”
    • 18 Annual Report 2008 ABP A structure was chosen in which ABP holds 100 per cent of the capital in the administra- tive organisation. The pension fund has entered into a long-term contract with the admi- nistrative organisation which safeguards the continuity of the pension fund and keeps costs under control. Their relationship is governed by a system comprising a master contract, subsidiary con- tracts and a service level agreement (SLA) for the coming year. When negotiating this first SLA, the Board of Governors was advised by external consultants on the selection of effective key performance indicators (KPIs). It is the task of the Board of Governors to verify the correct implementation of this contract, in accordance with the requirements of the Pensions Act. The Board of Governors monitors the functioning of the contractual arrangements on the basis of status reports and checks. An Executive Office has been set up by the pension fund to ensure close monitoring of the administration and risk management functions on a continuous basis. Effective cooperation between the Executive Office and the administrative organisation is essential for the effi- cient functioning of the pension fund. Where necessary, the Executive Office has recourse to external assistance and advice. In the coming year, the Executive Office will focus inter alia on placing the assessment of the fund’s risk management on a more independent footing. Merger with Cordares The merger between the administrative organisation and Cordares as announced in the previous annual report was finalised in 2008. Credit crisis The credit crisis occupied much of the Board of Governors’ attention in the second half of 2008, and particularly in the last four months. The financial position deteriorated very rapidly and, while the long-term strategic aim of investment policy remains unchanged, corrective action has been taken where necessary. For example, the Board of Governors has made several tactical changes to lower the risk profile to some extent and extended the duration of the portfolio of fixed-income investments to hedge against the effects of a further fall in long-term interest rates. The consequences of the credit crisis prompted the Board of Governors to consider the possibility of adjusting the balance between pension affordability and ABP’s ambition to apply full indexation on the one hand and the associated risks on the other. Risk policy Integrated risk framework Risk management is a priority issue for ABP, given its mission, the growing complexity of the business processes, the increasingly discerning client base, the new legislation and regulations and the higher risk management standards demanded by the regulators. The multitude of internal and external developments make effective internal management more important than ever. Raising risk-awareness is high on the agenda. A strategic approach was taken to risk assessments conducted in the context of risk workshops in 2008, not only dealing with the statutory requirements but also identifying risks that are relevant to day-to-day operations. Discussion and assessment of the strategic risks results in an integrated risk framework that helps to determine how ABP runs the risk control and management functions.
    • 19 Annual Report 2008 ABP Compliance Compliance with legislation Because ABP attaches great value to its integrity and reputation, compliance with internal and regulations and external standards and values is closely monitored. As well as observance of legislation and regulations, compliance also refers to the integrity of people and processes and how that is embodied in the organisation. ABP is subject to various forms of supervision, both prudential supervision (Nederlandsche Bank or DNB) and business conduct supervision (Authority for the Financial Markets in the Netherlands or AFM). In order to demonstrate to regulators that it complies with the legislation and regulations, ABP in turn has to verify that the activities of the pension administrator also comply and has to demonstrate compliance by its own Board of Governors and staff. In discharging its responsibilities in this area, ABP has conducted an in-depth analysis of its compliance tasks and responsibilities. The relevant legislation and regulations requires ABP to distinguish between its own tasks and those that have been outsourced to the compliance function of the administrative organisation. Its own tasks relate primarily to business conduct supervision and the outsourced functions are mainly concerned with prudential supervision, in which ABP’s Board of Governors performs a monitoring and oversight role. As well as the Pensions Act and the Financial Supervision Act (Wft), other legislation comes within the scope of the compliance function, such as the Occupational Pensions Scheme (Obligatory Participation) Act 2000 (WBPF) and the Personal Data Protection Act (WBP). Internal control The Board of Governors of ABP is responsible for the fund’s financial position and, in that context, for the existence, configuration and functioning of the internal risk management and control systems. The purpose of these systems is to monitor progress towards the pension fund’s strategic, operational and financial objectives and enable reliable financial reporting. The administrative organisation is responsible for the management of the risks associated with outsourced processes. The outsourcing risk incurred by ABP is controlled inter alia via periodic reporting by and consultation with the administrative organisation. In the in-control statement included in the chapter on risk management, ABP affirms inter alia the quality of the internal risk management and control systems with respect to financial reporting on the outsourced investment and pension fund management pro- cesses. This statement is based in part on an in-control statement issued to ABP by the administrative organisation in that regard. Corporate social responsibility Contributing to For over 85 years, ABP has been helping to build a secure future for its clients, now a secure future numbering 2.8 million participants and 4,000 employers in the public and education sectors. Dependability and a long-term view are central to ABP. The fund is an important player in the community, both directly through its activities on behalf of employers and employees in the public and education sectors and indirectly via its investments. That is why ABP is focusing increasingly on the effect of its activities on people, both outside and inside the organisation, and on the environment. Solidity, dependability, humanity and transparency are its core values. In a society and economy that are constantly changing, ABP has the strength, the duty and the ambition to continue discharging its social and economic responsibilities. Corporate social responsibility (CSR) is therefore a priority for ABP at all times. CSR is about the balance between people, planet and profit – society, environment and economy.
    • 20 Annual Report 2008 ABP With capital comes influence, and with influence comes responsibility. As a major investor occupying a prominent position in the capital market, ABP is well aware of that respon- sibility. With some of its investments it exerts significant influence and with others come social responsibility. ABP’s Board of Governors pursues its own policy on environmental, social and corporate governance (ESG) aspects with regard to the asset management function. National and international regulations Growing influence of ABP stays abreast of new legislation and regulations, both national and international. ABP regulations does not shrink from exercising influence where necessary in the interests of sustaining the collective pension system. It was partly due to ABP’s efforts that the period allowed in the Pensions Act for recovery from a funding shortfall was ultimately set at three years instead of the original one year. International regulations have also threatened to make an increasingly profound mark on the Dutch pension system. International legislation is often tailored to individual pension systems, which are far more common around the world than our collective system. Some European politicians, for example, have argued in favour of extending Solvency II, the regulatory framework for insurance companies, to pension funds. This would have set far higher standards on pension fund capital, the minimum required funding ratios would have been higher and the period allowed for recovery from a funding shortfall would have been reduced to one year. This argument ignores the fact that collective pension funds have more levers at their disposal than insurance companies to limit their risks, making it unnecessary to apply Solvency II. One of the principal attributes of collective pension funds is solidarity between generations. Fortunately, most European politicians are now persuaded of these differences, but we must be on guard. There was also some debate in 2008 on the international (IAS 19) and national (RJ 271) accounting rules for pension funds. These accounting rules wrongly stated that employers had to account for all pension risks if the collective was exposed to any risk. In the Dutch system, pension risks are shared by the active participants, pensioners and employers. The national accounting rules have now been amended and, in the new draft guideline (RJ 271), has moved from a risk approach to a liabilities approach. This means that a distinc- tion is no longer made between defined-benefit and defined-contribution schemes and they are covered by the general rules for the recognition of provisions. Employers are only required to include a liability in the balance sheet if there is de facto or de jure a liability to the pension administrator and/or employees on the balance sheet date. In view of the administrative savings that can be made in many cases, the Council for Annual Reporting has explicitly permitted the new draft guideline to be applied to the 2008 financial statements.
    • 21 Annual Report 2008 ABP Pension fund governance General Objectives ABP aims to provide a sustainable pension fund, based on principles of collectivity and solidarity, which is attractive to all participants. The Board of Governors of the pension fund is ultimately responsible for ensuring optimum quality, accuracy and openness in implementation of the pension scheme agreed by the employers’ and employees’ organisations. The Board of Governors considers that pension fund governance must not only comply with the relevant rules and standards, but must also contribute to the achievement of the fund’s objectives. The Board of Governors endorses and will comply with the principles of good pension fund governance formulated by the Labour Foundation (STAR) in December 2005. The governance structure was reconfigured and implemented in accordance with those principles in 2008. Pension fund governance structure Configuration ABP’s governance structure consists of four elements: pension fund governance, internal supervision, codetermination and accountability. The Board of Governors has thirteen members: six members appointed by employees’ organisations, six members appointed by employers’ organisations and an independent chairman, who does not have a vote. The expertise of the members of the Board of Governors must be of an adequate level, as determined by the Nederlandsche Bank (DNB), in the interests of the participants, former participants and other stakeholders in the fund. The Board of Governors is required to notify DNB in advance of any change in its com- position and to notify DNB immediately of any subsequent disclosure concerning a member’s background. The Board of Governors is responsible and has authorisation for: – amendment and adoption of the Articles and regulations of the fund, including the pension regulations and the administrative regulations; – implementation or outsourcing implementation of those regulations; – management of the fund in accordance with the financial policy, which includes risk policy, investment policy and determination of contribution rate and indexation; – communication policy; – entering into service agreements and an SLA with the administrative organisation and monitoring correct implementation of those agreements; – entering into obligations with third parties, whereby the chairman, an employers’ member and an employees’ member jointly represent the fund. The Board of Governors is assisted in the performance of its duties by an Executive Office, the responsibilities of which include: – advising and assisting the Board of Governors, for example in negotiating the implementati- on agreement with the employers’ and employees’ organisations in the Pension Chamber; – consultation with the Pension Chamber; – entering into and monitoring the service agreements and SLA with the administrative organisation; – policy formulation by the Board of Governors; – compliance with the (statutory) requirements relating to pension fund management, including governance.
    • 22 Annual Report 2008 ABP Five committees have been formed to ensure optimum performance of the duties of the Board of Governors: the Audit Committee, the Fund Policy Committee, the Investment Policy Committee, the Appeals Committee and the Remuneration Committee. These committees act in an advisory capacity. As well as by the committees, the Board of Governors is also advised by independent bodies which do not include members of the Board of Governors: the Participants’ Council, the Employers’ Council, the Investment Committee and the accountability body. The Audit Committee, which carries out preparatory work for the Board of Governors, brings together the requisite financial expertise to support decision-making by the Board of Governors. The Audit Committee monitors: – the functioning of the risk management and control systems; – the accuracy of financial accounting; – compliance with legislation and regulations; – the integrity of the published financial information. As well as six members of the Board of Governors, three external experts also have seats on the committee. The Fund Policy Committee is responsible for the preparation of policy for the fund’s (strategic) long-term plan, including financial policy (risks, contribution rate and indexation), pension policy and administration policy. The committee consists of three members of the Board of Governors from the employees’ side and three members of the Board of Gover- nors from the employers’ side and is chaired by the chairman of the Board of Governors. The Investment Policy Committee is responsible for preparation of the fund’s (strategic) investment plan and the constraints imposed by the fund, including those relating to ESG factors. The committee consists of three members of the Board of Governors from the employees’ side and three members of the Board of Governors from the employers’ side and is chaired by the chairman of the Board of Governors. The committee consults regularly with the External Investment Committee. The Appeals Committee decides on behalf of the Board of Governors on appeals by interested parties against decisions taken under the fund’s Articles and regulations. The committee consists of a number of members of the Board of Governors and a number of independent members appointed by the Board of Governors for their expertise. The Board of Governors has appointed a Remuneration Committee, which sets constraints on the social policy of the administrative organisation on behalf of the Board of Governors. The committee makes preparations for the recruitment and selection of members of the Executive Board of APG Groep NV, a holding company which also controls the administra- tive organisation. The mitigated two-tier structure regime is applicable to this holding com- pany. As shareholder, ABP also determines the remuneration of the members of this Executive Board, on a proposal by the Supervisory Board of the administrative organisation. The committee consists of the two vice-chairmen of the Board of Governors, one Member of the Board of Governors from the employees’ side and one member of the Board of Governors from the employers’ side and is chaired by the chairman of the Board of Governors.
    • 23 Annual Report 2008 ABP The Investment Committee advises the Board of Governors on investment policy. The committee of external experts is international in composition, with a profile appropriate to a body advising on investment policy. The committee was augmented in 2008 with the appointment of two members, Messrs. Evans and Kjaer. The Participants’ Council, representing the interests of the participants and pensioners, and the Employers’ Council, representing the employers in the public and education sectors, are the principal advisory bodies supporting the Board of Governors and provide the Board of Governors with solicited and unsolicited advice on policy. The Board of Governors has outsourced policy preparation, pension administration, communication and asset management to the administrative organisation. As well as a master contract, there are also three further service agreements between the pension fund and the administrative organisation, for pension administration, asset management and other services. The fund also enters into an SLA each year with the administrative organisation. Internal supervision The Pensions Act requires every pension fund to set up its own system of internal supervision employing external and independent experts with effect from 1 January 2008. The Act gives a choice of four different forms: a visitation committee, a supervisory body, an expanded audit committee or a one-tier-board. To meet this internal supervision requirement in a manner appropriate to a large pension fund, ABP’s Board of Governors decided to expand the (existing) Audit Committee by adding three external and independent members. The external members of the Audit Committee function in the same way as all the other members of the Audit Committee except that they are specifically and independently charged with assessing the functioning of the Board of Governors. The Act confines the supervision exercised by the external members exclusively to assessing the fund’s policy-making and management procedures and processes, the checks and balances, the fund’s governance and the way in which the Board of Governors manages risks in the longer term. The external members may, however, elect to investigate other aspects in addition to their statutory duties. The assessment by the external members of the functioning of the Board of Governors is an extension of the evaluation process which is part of the primary task of the Audit Committee. The external members of the Audit Committee discuss their findings with the Board of Governors and report on their assessment in the context of internal supervision. The Board of Governors took the following action in 2008 in implementation of the internal supervision system: – In compliance with Section 106 of the Pensions Act, article 20 of ABP’s Articles was amended to include internal supervision in the form of an Audit Committee augmented with three external members. – By-laws were formulated for the Audit Committee which include internal supervision. – A profile was compiled by the Board of Governors for external members of the Audit Committee. – The Board of Governors appointed Messrs. De Swaan, Klopper and Crone as external members of the Audit Committee. – Several members of the Board of Governors and staff of the Executive Office held introductory meetings with the external members of the Audit Committee.
    • 24 Annual Report 2008 ABP Reporting by external Because the external members of the Audit Committee were not appointed until late last members of the Audit year, they had no opportunity in 2008 to form an opinion based on their findings. Last year Committee can therefore be seen as a period of preparation for the configuration and implementation of the system of internal supervision. The external members of the Audit Committee are starting work in 2009 and will produce a report this year based on their findings, which they will discuss with the Board of Governors before submitting their final report to the accountability body. Co-determination In compliance with the Pensions Act and, before that, the Pensions and Savings Funds Act, ABP has had a Participants’ Council since 2004. The Board of Governors, being composed of representatives of employers and employees, considered it important to take advice from both camps, and therefore created an Employers’ Council at the same time. Both councils consist of 36 members. The Participants’ Council of ABP consists of 22 employees’ representatives and 14 pensioners’ representatives, who are appointed by the four trade unions for public-sector personnel (AC, ACOP, CCOOP and CMHF) and the Dutch Association of Pensioners’ Organisations (NVOG). In the Employers’ Council, the members of the different segments within the public and education sectors are represented on a proportional basis. Appointments are made by the Civil Service Sectoral Association (VSO) and the Energy and Utility Companies Employers Federation (WENb). Details of the membership of the councils can be found at the end of this annual report. The powers and responsibilities of the councils are defined in ABP’s Articles and the by-laws of the councils. The function of the councils is to advise the Board of Governors on matters on which the latter is required by the Articles to request advice and on any other policy matters on which the councils consider advice necessary. Pursuant to ABP’s Articles, the Board of Governors must seek the advice of the councils on the following matters: – adoption and amendment of the Articles and pension regulations; – adoption of the contribution rate and indexation percentage; – adoption of the annual report, the budget, the Actuarial and Business Memo and, where applicable, the recovery plan; – transfer of obligations; – winding-up of the fund. The Board of Governors thanks the councils for their contribution to the discussions of the developments affecting the pension fund and all its stakeholders. The members of the accountability body are appointed from among the members of the Participants’ Council and the Employers’ Council. Accountability body ABP appointed an accountability body within the meaning of the Pensions Act on 12 February 2009. It consists of 36 members, of whom one-third are appointed from the delegation representing the pensioners, one-third from the delegation representing the participants and one-third from the delegation representing the employers. The affiliated employers’ delegates are appointed by the Civil Service Sectoral Association (VSO) and the Energy and Utility Companies Employers Federation (WENb) from among the members
    • 25 Annual Report 2008 ABP of the Employers’ Council. The participants’ delegates are appointed by the trade unions for the public and education sectors from among the members of the Participants’ Council. The pensioners’ delegates are appointed by the trade unions and the Dutch Association of Pensioners’ Organisations (NVOG) from among the members of the Participants’ Council. The responsibilities and powers of the accountability body are defined in ABP’s Articles and the by-laws of the accountability body. The Board of Governors is accountable to the accountability body for the policy and its implementation and for compliance with the prin- ciples of good pension fund governance, as referred to in the Pensions Act Implementing Decree and the Obligatory Occupational Pension Schemes Act (WvB) of 18 December 2006. The accountability body is authorised pursuant to article 2 of its by-laws to give a judgment on: – the actions of the Board of Governors; – the policy pursued by the Board of Governors in the past year; – the policy choices for the future; – compliance by the Board of Governors with the principles of good pension fund governance as referred to in article 19 of the Articles. This judgment, together with the response of the Board of Governors to it, is included in the fund’s annual report. The reports compiled under the responsibility of the Participants’ Council and the Employers’ Council are included in the next chapter, together with the report of the accountability body.
    • On 29 May 1953, Edmund Hillary and his guide Tenzing Norgay were the first men to reach the summit of Mount Everest, at 8,848 metres the highest point on Earth. Norgay, a Nepalese Sherpa, knew the Himalayas better than anyone. The son of a yak herder, he had already taken part in six previous attempts to conquer Everest. After the successful climb in 1953, he was awarded the George Medal, a top British medal for bravery. His son Jamling would follow him to the top of Everest in 1996. New Zealander Hillary had taken part in a failed attempt on the summit of Everest in 1951. Following his successful expedition with Norgay, he returned six times to the Himalayas in the 1950s and 1960s. Hillary’s life was not all high E dm un d h illary points: in 1975, his wife and daughter were killed in a plane crash while en route to join him. Ten z in g n or g ay When his active climbing career ended, Hillary involved himself with the problems of the Nepalese people. He was also able to exercise First to reach the summit political influence on Nepal’s behalf: in 1985, he was appointed New Zealand ambassador to of Everest in 1953. India, Bangladesh and Nepal, a post which he held for four and a half years. Edmund Hillary, who died in early 2008 at the age of 88, was known for his modesty. It was not until 1999, long after the death of his climbing partner Tenzing Norgay, that he revealed that he, Hillary, had been the first actually to set foot on the summit of Everest on 29 May 1953. Since Hillary and Norgay, hundreds of people have climbed to the top of Everest. Junko Tabei from Japan was the first woman to reach the summit, on 16 May 1975.
    • Ten weeks to reach the summit Katja Staartjes is so far the only Dutch woman to have reached the top of Mount Everest. She has also climbed various other mountains higher than 8,000 metres. As she explains, if you want to reach the summit reasonably safely, what you need most of all is lots of patience. Taking ten weeks for a climb is certainly not exceptional. Katja has been devoted to mountaineering since 1998 and, as well as Everest, has also climbed other giants such as Cho Oyu, Ama Dablam, Gasherbrum 1 and Dhaulagiri. As she explains, “On average you have a base camp at around 5,000 metres on mountains like these. You certainly have to count on four to six weeks from base camp to the summit. Firstly, the weather up those mountains is often bad. And then there’s nothing you can do but wait at base camp. And you also need that time to adjust to the thin air as that creates a lot of problems for your body. That’s why you climb a bit, set up your tent camp and then go back to base camp to recover. There is so little oxygen at those altitudes that your body literally starts breaking down. What’s more, you can hardly eat because all your blood is in your brain, heart and lungs and hardly any in your digestive tract. Once you get back to base camp, there’s more oxygen and you start feeling hungry again. That’s when you start building yourself up for the next climb, when you go a bit further up the mountain. When you leave base camp, you take some more equipment with you for your next tent camp. That means extra ropes, gas to cook with and so on. In that way, it takes you between three and six rounds to reach the summit. And something will always go wrong when you’re going up and down the mountain. You go back up the mountain, for example, and the tents turn out to have blown away. In my view, that is the main reason why climbers give up on those high mountains. They haven’t got the patience and don’t have the mental resources to deal with all the setbacks.” Dangerous Her most recent climb was in October 2008, when she got within 30 metres of the summit of Manaslu in Nepal. For various reasons it was considered too dangerous to climb the last few metres of the 8,163 metre-high mountain. “Obviously we were disappointed,” explains Katja Staartjes. “But we were also pleased to get home safely. Don’t forget that one out of every twenty mountaineers doesn’t return alive from these mountains.”
    • 28 Annual Report 2008 ABP Reports of the Participants’ Council, Employers’ Council and accountability body Report of the Participants’ Council Two members of the Participants’ Council, Messrs. Kleefstra and Roggema, passed away in 2008. We remember them as highly valued members of our council. 2008 was also an eventful year for the Participants’ Council in many respects. Considerable time and energy was devoted to complex issues including the introduction of the Pensions Act, the separation of the pension fund from the administrative organisation and, of course, the credit crisis and its consequences for the fund and its stakeholders. Fund position, contribution From the late summer of 2008, the Participants’ Council closely monitored the develop- rate and indexation ments affecting the fund in the wake of the credit crisis. The council, like the Board of Governors, could do little more than stand by powerless as the fund lost a substantial part of its assets and the funding ratio dropped from 140 to 90 per cent, reflecting the abrupt fall in market prices and the declining market interest rate. During that period, the Parti- cipants’ Council was frustrated by the obfuscatory language of the reporting on ABP’s results. While the Participants’ Council understood why the Board of Governors was unable to apply structural indexation as from 1 January 2009, it strongly urged the Board of Gover- nors to consider payment of a one-off benefit to the pensioners. The Participants’ Council pointed out that it was precisely the pensioners whose purchasing power was being impaired and who derived scarcely any benefit from the government’s measures. After lengthy debate, the Board of Governors promised to reconsider indexation in mid-2009, in the light of the situation prevailing at that time. Separation of pension Following changes in legislation and regulations, ABP’s Board of Governors decided in late fund and administrative 2007 to separate the pension fund and the administrative organisation. The consequences organisation of this decision were discussed at length with the Participants’ Council, resulting in an amendment to the fund’s Articles with effect from 29 February 2008 on which the Council gave a positive recommendation. One of the main issues was whether the Participants’ Council which have any influence over the SLA which the fund would enter into with the administrative organisation each year. The Participants’ Council argued that the way in which administration was outsourced by the fund was particularly relevant to the parti- cipants and pensioners. After an in-depth debate, the Board of Governors acceded to the wishes of the Participants’ Council and gave the Council the right to advise on the SLA. The Participants’ Council first exercised this right in November 2008, when the SLA for 2009 was finalised, having been involved in the preparatory phase. The Council was also successful in persuading the administrative organisation to set up a Client’s Council, which has direct influence on the treatment of participants and pensioners by the administrative organisation. The Participants’ Council considers that the consultancy procedure relating to the formulation of the profile for members of the Supervisory Board of the administrative organisation was not executed correctly and has instituted proceedings before the Enterprise Section of the Court of Appeal. Following intensive discussions covering all the Council’s questions and observations on the profile, the Council withdrew its action before the Enterprise Section.
    • 29 Annual Report 2008 ABP Good pension fund The Pensions Act imposes rules on the organisation of co-determination, accountability governance and internal supervision by pension funds. ABP instituted an accountability body in 2008 and complied with the internal supervision requirements by appointing three external members to the Audit Committee (investigative committee), with their own authority to assess the functioning of the Board of Governors. The Participants’ Council gave a positive recommendation to the Board of Governors’ proposals concerning these measures and the related amendment of the Articles, the by-laws of the accountability body and the by-laws of the Audit Committee. Following the Council’s positive recommendation, the Board of Governors adopted this amendment of the Articles in August 2008. The amend- ment was notarially documented on 2 February 2009. Regular matters More routine matters on which the Council’s recommendation was requested included: – the fund’s 2007 annual report; – the annual plan for the second half of 2008; – technical adjustments to the Actuarial and Business Memo; – amendments and updates to the statement of investment principles; – changes to the pension regulations in connection with the relaxation of the existing anticumulation provisions for those in receipt of income in addition to benefit under the flexible pension and early retirement benefit scheme (FPU); – the fund’s new administrative regulations focusing on the affiliated employers. Report of the Employers’ Council In Mr. Paul Sieverding, who passed away in 2008, we miss a highly valued colleague. The Employers’ Council’s objectives in 2008 were: – to improve and optimise its own functioning; – to optimise cooperation with the Board of Governors and the Participants’ Council; – to achieve closer coordination with the Civil Service Sectoral Association (VSO). The Employers’ Council organised its activities with a view to achieving these objectives. The Employers’ Council followed a clear line in its recommendations on pension fund governance, the service agreement with administrative organisation APG, changes to the regulations, implementation of the accountability body and the decisions on contribution rates and indexation. It emphasised that the Employers’ Council attaches great value to transparency in all respects and to clear, timely, accurate and complete communication and considered it important to maintain a consistent policy line. In a meeting with a delegation from ABP’s Board of Governors and the Participants’ Council, agreement was reached on improving cooperation between the Board of Governors and the councils, while respecting each body’s position. In the course of preparing its response to requests for recommendations, the Employers’ Council organised meetings among its own members and with other organisations such as the VSO. With a view to optimising the Employers’ Council’s own functioning, it was decided in consultation with VSO and the Energy and Utility Companies Employers Federation (WENb) to take up some of the allocated number of seats on the accountability body. The configuration and composition of the accountability body was also discussed and agreed with those bodies.
    • 30 Annual Report 2008 ABP A delegation from the Employers’ Council consulted first with a delegation from the Participants’ Council and then with the Board of Governors on the configuration of the accountability body. The Employers’ Council’s preference was for the accountability body to consist of a small number of members (a maximum of six per delegation), but it was finally decided that there would be twelve seats for each delegation. The Employers’ Council considers the following to be the most important issues in 2009: – the recovery plan; – cooperation with the Board of Governors, Participants’ Council and accountability body; – progress in strengthening its own role and developing its expertise. Report of the accountability body The accountability body received the following information from the Board of Governors to assist in arriving at its judgment: – draft 2008 annual report; – draft 2008 financial statements; – (draft) external auditors’ report; – (draft) actuarial statement and management summary by the external actuary for the 2008 financial year; – quarterly reports for 2008. At its plenary session on 9 April 2009, the accountability body met the external auditors and the external actuary. The report of the external auditors was not available at that time and was not presented until after the report of the accountability body had been con- sidered at the consultation meeting with the Board of Governors and adoption of the final report for 2008 by the members of the accountability body. The (draft) management summary was discussed with the external actuary. No meeting was held with the external members of the Audit Committee because this internal supervision process did not start until 2009 and the members will therefore not have had an opportunity to form an opinion concerning 2008. No meeting was held with the compliance officer. A further meeting will be held with the external actuary later this year on the review of actuarial assumptions on which a report is to be submitted in the course of 2009. A number of questions raised by the accountability body concerning the content of the draft 2008 annual report and draft 2008 financial statements and the responses to those questions by ABP’s Board of Governors were discussed at a consultation meeting with the Board of Governors on 15 April 2009. The meeting also discussed the content of the draft 2008 report of the accountability body. In the coming months, the accountability body will concentrate on the performance of its other tasks and, in consultation with the Partici- pants’ Council and Employers’ Council, consider how to proceed with translating task allocation into operational practice. The accountability body for ABP has existed for only a short time, having been installed on 12 February 2009. There was relatively very little time, therefore, for the accountability body to perform its tasks during the process of preparing the annual report and financial state- ments. Several important documents were not yet available, it was not possible for a variety of reasons to consult with the external members of the internal supervision body or the compliance officer and the meetings with the external auditors and the external actuary were held at the last minute. Despite the pressure of time and the limited information available, the accountability body accepted the responsibility to perform an assessment of all aspects of ABP’s function, focusing both on the fund’s performance of its tasks and on the consultation structures that are conducive to optimum performance.
    • 31 Annual Report 2008 ABP The accountability body’s findings, its judgment and its recommendations relating to the activities defined in article 2 of the regulations are presented below, together with the Board of Governors’ response. Findings There was a change in the organisational structure of Stichting Pensioenfonds ABP last year, with the separation of the ABP pension fund from the administrative organisation with effect from 1 March 2008. The administration has been transferred to APG Algemene Pensioen Groep NV under a long-term agreement. The main tasks performed by the administrative organisation on behalf of the fund are pension fund administration, asset management, communication and services supporting the Board of Governors. This outsourcing arrangement is defined in a master contract and three subsidiary contracts, which have been distilled into an SLA for 2009. Management of the strategic, operational and compliance risks associated with the outsourcing of the various processes requires the Board of Governors’ constant attention. ABP’s Board of Governors is ultimately responsible for the management of the fund and the administration of the schemes. The risks to which ABP is exposed are discussed in Chapter 7 ‘Risk Management’ of the annual report and in the section on risk in the financial statements. Information is also given there on ABP’s policy on managing those risks. The accountability body considers that the report presents a clear picture, but only gives a brief outline of the measures taken by the Board of Governors to mitigate the effects of the credit crisis in 2007 and 2008 and their timing. The accountability body has asked the Board of Governors to provide a retrospec- tive analysis of the measures taken in the context of the credit crisis (and their timing). The Board of Governors has given an undertaking to comply with the accountability body’s request. The accountability body notes that the credit crisis has caused the investment portfolio to underperform. Given ABP’s prominence and the participants’ understandable wish to be able to judge whether their pension capital is being professionally managed, this underper- formance needs to be placed in a broader context. Partly to assist the accountability body, an historical review of outperformance and underperformance covering several years is desirable. The accountability body fully endorses the policy of the Board of Governors designed to provide good and affordable pensions for the participants and to preserve a system based on the principles of collectivity and solidarity. The accountability body considers that the Board of Governors performed satisfactorily in 2008 in applying to the pension fund the principles of good pension fund governance as formulated by the Labour Foundation in 2005 and embodied in the Pensions Act. Good pension fund governance requires a high level of expertise on the part of the Board of Governors and its individual members. A structured expertise development programme is required. The accountability body will return to this issue in its assessment of the 2009 annual report. As from 1 January 2009, the Stichting Pensioenfonds ABP’s governance was brought into line with the changes in the Pensions Act and the restructuring of Stichting Pensioenfonds with effect from 1 March 2008. In this context, the accountability body advises the Board of Governors to pay special attention to consolidating the new structure and developing the Executive Office.
    • 32 Annual Report 2008 ABP The Board of Governors has stated that ABP – and by extension the administrative organisation – is in control, which means that internal risk management and control systems relating to the financial accountability of the outsourced investment management and pension administration processes are in place and are of satisfactory quality in terms of their configuration and functioning. The accountability body has asked the Board of Governors to have the in-control statement validated by the external auditors. The Board of Governors complied correctly in 2008 with the applicable legislation and regulations and the fund’s Articles and regulations. The accountability body did find, however, that the implementation of a number of new obligations had been postponed. This decision had been taken by the Board of Governors after consulting the regulator. The accountability body is concerned at the rise in pension administration costs per participant and urges action to mitigate these costs. The decisions on contribution rates and indexation for 2008 were taken after careful consideration and in accordance with current policy. The turmoil on the financial markets, especially in the second half of 2008, impacted very heavily on the fund’s position and by year-end the nominal funding ratio had fallen to 89.6%. A recovery plan was adopted and submitted to DNB on 31 March 2009. Good asset management is essential if the fund is to meet its future obligations, which is the objective of ABP’s investment policy. The worsening problems on the financial markets are now making effective investment management very difficult. In the fourth quarter of 2008, the Board of Governors decided that the risk profile within the current strategic policy framework needed to be modified to suit the new situation. The accountability body endorses this action. The credit crisis has demonstrated that shareholders need to be alert if undesirable developments within companies or sectors are to be avoided. The accountability body recommends that the Board of Governors give high priority to active shareholdership. The accountability body places great value on good communication with the participants and employers. The accountability body has found in recent months that, given the effects of the credit crisis, there is a growing need on the part of the Participant’s Council and Employers’ Council in particular for good information and communication regarding the fund’s position. The accountability body also notes that, according to the Participant’s Council and Employers’ Council, the supply of information to and communication with these bodies in late 2008 should have been faster and more complete. The accountability body wishes to emphasis that timely and transparent communication with all stakeholders concerning the fund’s position is vitally important, in good times and in bad. Communication with all stakeholders must be high on the Board of Governors’ agenda. The accountability body endorses the Board of Governors’ policy for the future, which was recently adopted against the background of the drastic change in the fund’s position and has been translated into actions defined in the recovery plan. The accountability body notes the position taken by the Employers’ Council that the temporary contribution surcharge in particular should be accompanied by some retrenchment in entitlements. The Participants’ Council takes the view that the temporary contribution surcharge may not be lifted until retrospective indexation has been applied. The accountability body also notes that the
    • 33 Annual Report 2008 ABP Participants’ Council wants a reassessment of the recovery plan in the fourth quarter of 2009, together with a review of the fund’s position and reconsideration of whether (retrospective) indexation can be applied, in the context of the reduction or lifting of the contribution surcharge. The accountability body endorses the decision by ABP’s Board of Governors to argue in favour of the review of a number of principles when the Financial Assessment Framework (FTK) is evaluated. The accountability body notes that, in their unqualified report on the financial statements, the external auditors state that the financial statements give a true and fair view of the fund’s financial position as at 31 December 2008 and its result for the year then ended in accordance with Part 9 of Book 2 of the Netherlands Civil Code. When it has been issued by the external auditors, the auditors’ report will be discussed with the Board of Governors by the accountability body. The accountability body has discussed the (draft) management summary with the external actuary. An actuarial statement on the financial statements has been issued by the external actuary. Judgment This judgment by the accountability body on the policy of the Board of Governors relates to a turbulent year in which the fund sustained a very substantial loss on the pension capital and is given in the light of all the developments that have affected the financial markets and the global economy. As a very large fund, ABP is by definition involved in these developments. Against that background, the accountability body finds that the Board of Governors has responded actively to developments to the best of its ability. Despite the fund’s extremely disappointing result last year, the accountability body therefore takes a generally positive view of the actions of the Board of Governors, the policy it has pursued, the policy choices it has made and the way in which it has complied with the principles of good pension fund governance. The accountability body judges that the fund is being managed by the Board of Governors with great commitment and expertise and with the professional support of the Executive Office. The meetings between the Board of Governors, the Participants’ Council and the Employers’ Council serve as a forum in which the interests of the stakeholders in ABP are rigorously protected. The Board of Governors has taken account of these interests in a balanced manner. The accountability body notes that the external auditors and the external actuary have given unqualified opinions on the financial statements. Unfortunately, it was not possible to meet with the external members of the Audit Committee this year, but a meeting on the 2009 annual report will be held next year. Recommendations The accountability body makes the following recommendations: a. extra attention needs to be paid to consolidating the structural change and developing the Executive Office b. outperformance and underperformance need to be placed in a historical perspective covering many years c. in the context of investment policy, high priority needs to be given to active shareholdership d. there must be transparent and timely communication to all stakeholders of information on the fund’s position
    • 34 Annual Report 2008 ABP e. more time needs to be allowed for the accountability body in the process of preparing the annual report and financial statements f. a retrospective analysis should be carried out of the actions taken in response to the credit crisis and their timing g. a plan needs to be drawn up to promote development of the expertise of the Board of Governors and its individual members h. the in control statement needs to be validated i. the administration costs per participant must be reduced j. high priority needs to be given to the evaluation of the FTK. Response of the Board of Governors to the report of the accountability body The Board of Governors took cognisance on 15 April 2009 of the findings, judgment and recommendations of the accountability body relating to the policy of the fund’s Board of Governors and finds no grounds for comment therein. The accountability body’s recom- mendations are fully endorsed by the Board of Governors and will be incorporated by the Board of Governors in its annual plan. The Board of Governors thanks the accountability body for the effort it has invested in arriving at a well founded judgment of the policy that the Board of Governors has pursued, especially given the very short time available between the installation of the accountability body and the adoption of the annual report.
    • 35 Annual Report 2008 ABP Financial policy The fund’s financial position Funding ratio The funding ratio had fallen to 90 per cent by year-end 2008, from 140 per cent only one year before. What started in 2007 as a credit crisis in the United States turned in 2008 into a global economic recession that also undermined the stability of the European financial sector. With the deepening of the international credit crisis following the failure of US merchant bank Lehman Brothers, the second half of 2008 brought the collapse of equities and real estate markets and sharply falling interest rates. With a return of 20 per cent negative, the fund’s investment result in 2008 was historically low. This was mainly due to equities and alternative investments, which impaired the value of ABP’s assets. At the same time, the value of the nominal liabilities was also significantly increased by the fall in the capital market interest rate in 2008, from 4.85 per cent to 3.57 per cent. The combination of lower asset values and higher liabilities reduced the funding ratio in 2008 to 90 per cent. Table 5.1 compares the nominal funding ratio in 2008 with the funding ratio required by law, based on the standard model. Table 5.1. Nominal funding ratio for pension fund (in %) Actual Required Shortfall / funding ratio funding ratio surplus Year-end 2007 140.0 125.8 14.2 Change in 2008 -50.4 -2.2 -48.2 Year-end 2008 89.6 123.6 -34.0 Funding and reserves The minimum required capital depends on the fund’s liabilities structure and is calculated shortfall according to the rules set by the Financial Assessment Framework Decree (Besluit Finan- cieel Toetsingskader). As at year-end 2008, ABP’s minimum required capital was 4.4 per cent, so the liabilities were 14.8 per cent underfunded (€ 28.4 billion). As at year-end 2008, the required funding ratio was 123.6 per cent, so there was also a reserves shortfall of 34.0 per cent (€ 65.5 billion). Table 5.2 shows the financial position at the end of 2008. Table 5.2. Financial position as at year-end 2008 (€ billion) Funding Reserves shortfall shortfall General reserve -20.0 -20.0 Minimum required capital 8.4 45.5 Shortfall -28.4 -65.5 As percentage of liabilities -14.8% -34.0%
    • 36 Annual Report 2008 ABP Recovery plan There was both a reserves shortfall and a funding shortfall. In principle, therefore, ABP was required to submit a recovery plan to the regulator (DNB) within two months, i.e. before the end of 2008. In the light of the exceptional circumstances, the Minister of Social Affairs and Employment extended the closing date for submission of recovery plans until 1 April 2009. The recovery plan had to provide initially for elimination of the funding shortfall within the statutory period of three years and of the remaining reserves shortfall within fifteen years. The Minister of Social Affairs and Employment decided, however, to extend the period allowed for rectification of the funding shortfall to five years. ABP has submitted a recovery plan to DNB which meets these requirements. Given the fund’s weakened financial position, the Board of Governors decided at the end of 2008 not to apply indexation. With this decision, an indexation shortfall of 4.73 per cent has arisen. The credit crisis The financial markets have been in turmoil since mid-2007, with prices of equities, cor- porate bonds, covered bonds and real estate falling across a broad front. At the same time, the prices of safe-haven investments such as government bonds and gold have shot up. Added to these violent price movements, day-to-day price volatility was also very high and there was considerable unrest particularly in the last four months of 2008. The balance sheets of practically all financial institutions came under strain and governments even had to rescue banks from imminent collapse. Interbank confidence was further undermined by the failure of Lehman Brothers in September 2008, with business and consumer lending virtually drying up. World economic growth, which had been steadily weakening in the previous quarters, slowed abruptly in the closing months of 2008. What caused the crisis? It is not possible to point to one single factor. High economic growth combined with low inflation, savings ratios that were too high in the emerging markets and too low in the United States, interest rates that stayed too low for too long, investors seeking higher returns, rapid innovation in the financial sector and poor risk perception on the part of various market parties – all played a part. With house prices rising sharply in the United States and an ample supply of capital at low interest rates, mortgages were given to households that were in fact unable to service their debt. These mortgages were then ‘packaged’ into innovative investment products. Investors were eager to buy these structured credits in view of the low interest rates on safe investment products. These widely diversified mortgage pools (with high credit ratings) appeared to offer a good return at low risk. Things took a different turn, however, when US economic growth slowed down, the housing market collapsed and mortgagors were unable to meet their commitments. Investors tried to dispose of their structured products, but in the absence of buyers the prices fell sharply. Banks found themselves in difficulty, hedge funds that operated largely on credit failed and ultimately the financial system seized up. Complete collapse was only prevented by heavy intervention by governments and central banks. How does a pension fund respond to a situation like that? There has been an intensive exchange of information and investment policy has been the subject of continuous discussion at ABP in the past few months. A swaption strategy has been adopted to provide some protection against the risk to the funding ratio of a sharp fall in interest rates and risk management and control has been intensified. Despite these measures, it is evident that even a large player like ABP relies heavily on market performance.
    • 37 Annual Report 2008 ABP Financial policy General The employers’ and employees’ organisations, together represented in the Pension Chamber, are responsible for determining the content of the pension scheme. The ambition to index pension rights fully and consistently to reflect pay trends in the public sector and education is part of the pension commitment to which the employers’ and employees’ organisations have agreed. Compensation for under-indexation through retrospective indexation is part of the indexation ambition. The Board of Governors is responsible for the overall financial policy of the fund and is advised on that policy by the Participants’ Council and the Employers’ Council. The financial policy comprises the contribution rate policy, the indexation policy and the investment policy and must be adopted as a whole. The fund’s financial position is a key determining factor in indexation policy. Full indexation is applied unless the fund’s financial position provides a compelling argument against such adjustment. Contributions policy Each year, the Board of Governors determines the cost-covering contribution rates for the various collective schemes: – average-pay schemes: retirement and surviving dependants’ pension scheme (OP/NP), surviving dependants’ pensions top-up (ANW) and occupational disability pension top-up (AOP) for non-military participants; – final-pay schemes: retirement and surviving dependants’ pension scheme (OP/NP) and surviving dependants’ pension top-up (ANW) for regular military personnel; – PartnerPlus Pension (PPP) for the police sector; – conditional past-service buy-back scheme. To mitigate contribution rate fluctuations, the cost-covering contribution rate is based on a prudent estimate of the expected long-term real investment return. Given the fund’s indexation ambition and the real nature of the pension liabilities, this is based not on a nominal, but on a real investment return, discounted at 3.0 per cent. This discount rate is tested once every three years, the next time in 2009 for setting the contribution rates for 2010. Retirement and surviving With effect from 1 January 2009, the cost-covering contribution rate for retirement and dependants’ pension surviving dependants’ pension (OP/NP) has been increased by 0.4 percentage points to contribution rate for 2009 20.4 per cent (including an unchanged 0.4 per cent surviving dependants’ pension (ANW) top-up). In the context of the recovery plan, it has also been decided to apply, in addition to this increase, a recovery surcharge to the cost-covering contribution rate for the duration of the funding shortfall. This surcharge will be 1.0 per cent in the second half of 2009. The increase in the cost-covering contribution rate, which is similar to last year’s, relates to the right to transfer from the flexible pension and early retirement benefit (FPU) scheme. The main reason for the increase in the contribution rate is a difference in pension accrual. Under the structural scheme, pension is accrued at 2.05 per cent above the low state pension (AOW) franchise (€ 10,350 as from 1 January 2009). Under the FPU transfer arran- gements, that is 1.75 per cent above the higher franchise (€ 16,700 as from 1 January 2009). The number of participants qualifying for transfer from FPU and accruing pension at a slower pace will decline from year to year. The contribution rate will rise from year to year until there are no more participants qualifying for transfer from FPU. The second reason is the shift in the client base. Because the reference age under the FPU transfer arrangements has been raised, participants are working longer, and the higher the proportion of older par- ticipants, the higher the pension contribution rate, because it is more expensive to fund their pension rights than those of younger participants.
    • 38 Annual Report 2008 ABP Occupational disability The 2009 occupational disability pension (AOP) contribution rate, which is a sector-wide pension contribution rate contribution rate, has been set for all sectors at the same level as in 2008, at an average for 2009 of 0.5 per cent. 2009 investment plan Investment policy is guided by the 2007–2009 strategic investment plan. As part of the recovery plan, the risk profile of the investment portfolio has been lowered slightly as from 1 January 2009, which has slightly decreased the risk of a downside deviation from the recovery plan. The 2010–2012 strategic investment plan will be developed in 2009. The total risk on the new strategic portfolio will be lower than that on the current strategic portfolio. The objective will continue to be preservation of ABP’s recovery capacity. Via the 2009 investment plan, ABP effected a number of changes to the investment policy. It was decided to increase the duration of the fixed-income part of the portfolio as a hedge against a fall in the long-term interest rate. Consistent with that policy, ABP gradually increased the duration still further in 2008 to nine years and plans to extend it to ten years in 2009. The currency hedge was also modified. A small part of the US dollar hedge against the euro was exchanged in 2008 for a full hedge of the UK pound and the Canadian and Australian dollars against the US dollar. The original position had been profitable in 2008, but was unwound in the light of the shift in relative values. The exchange risk with the US dollar is again being fully hedged in 2009, consistent with foreign-exchange policy under the strategic investment plan. Several changes were also made to the portfolio weightings. The allocations to hedge funds, convertible bonds and infrastructure were each increased by 1 percentage point and the norm allocation to equities was reduced by 3 percentage points. The expected return for hedge funds and convertible bonds is higher than for equities and the infra- structure was increased mainly to gain the additional inflation protection provided by certain market segments within infrastructure. With hedge funds and convertible bonds, the portfolio can continue to realise the long-term expected return. By partially replacing nominal bonds with index-linked bonds, nominal credit risk is replaced by inflation-related credit risk. Indexation policy The Board of Governors has discretionary powers to decide on the extent of indexation from year to year. It bases its decision on the indexation matrix, which is represented schematically in figure 5.1. The Board of Governors has discretionary powers to depart from the indexation matrix.
    • 39 Annual Report 2008 ABP Figure 5.1. Indexation matrix indexation + retrospective indexation where applicable 100% indexation 0% indexation funding ratio funding ratio lower limit minimum required upper limit (100%) (104.4%) (135%) In the interests of simplicity, transparency and clear communication, the Board of Governors decided in 2007 to fix the upper limit of the indexation matrix at 135 per cent. This means that, in principle, no indexation or only partial indexation may be applied if the funding ratio is up to 135 per cent. If the funding ratio is 135 per cent or higher, the Board of Governors may decide to apply full indexation and possibly retrospective indexation to compensate for indexation foregone in the past. The upper limit for less than full indexation is thus well above the required funding ratio (123.6 per cent as at year-end 2008). The upper limit of the indexation matrix is in principle reviewed every three years, taking into account ABP’s indexation ambition, financial and economic developments and the outlook at the time. Financial management The financial management of the fund focuses primarily on the long term. Its short-term financial management is based initially on the indexation policy and/or adjustments to the investment policy. Additional measures are in principle needed only if the prevailing financial policy fails to generate sufficient capital for a recovery. The matrix applies the following classifications in regard to recovery capacity: - if the nominal funding ratio is too low to meet the statutory minimum capital requirement, there is a funding shortfall. Recovery to the minimum required capital must in principle be achieved in at most three years, but this period has been temporarily extended to five years. - If the funding ratio is too low to meet the statutory minimum capital requirement but is sufficient to meet the minimum capital requirement referred to above, there is a reserves shortfall which has to be rectified within a maximum of 15 years. - If the funding ratio is higher than needed to meet the statutory minimum capital requirement but below the upper limit of the indexation matrix, the fund cannot apply full indexation. - If the funding ratio exceeds the upper limit specified in the indexation matrix, the fund is in principle strong enough to apply full and sustainable indexation. In principle, there is also scope for retrospective indexation to compensate for past indexation shortfalls. These classifications are shown schematically in figure 5.1.
    • 40 Annual Report 2008 ABP Indexation for 2009 Subject to the Board of Governors’ discretionary powers to decide differently, the funding ratio as at 1 November (the reference date) is compared with the indexation matrix. In 2008, this gave no scope for indexation, with a funding ratio on the reference date of 103.9 per cent, compared with the statutory minimum capital requirement of 104.4 per cent. This means that not only was there insufficient scope for indexation, but that there was in fact a funding shortfall. In its decision not to apply indexation, the Board of Governors took into account the further deterioration in the funding ratio since 1 November. On the basis of the actual trend in contractual salaries in the public sector and education over the period from 1 November 2007 to 1 November 2008, full indexation would have amounted to 4.73 per cent. This calculation takes into account the fact that, with respect to the collective labour agreements, an accord was reached between the negotiators by 1 November 2007 but the parties did not ratify the final agreement until after the reference date and these collective labour agreements are thus included in the 2009 indexation calculation. Excluding the lag in collective labour agreements, the actual contractual salary increase would have been 3.2 per cent. Value transfers While the funding shortfall persists, ABP may not cooperate in collective value transfers. If the funding ratio is below 100 per cent, ABP may not execute individual value transfers. In both cases, this refers to inward and outward value transfers. 2008 continuity analysis The Financial Assessment Framework requires pension funds to perform a periodic con- tinuity analysis. This analysis is one of the tools used by DNB to monitor pension funds’ financial position and it focuses on developments in the medium to long term. The analysis is designed to monitor consistency between the expectations created, the funding and the actual indexation granted. The continuity analysis also serves as the basis for communi- cation of the indexation expectation and as support for the recovery plan. ABP performed a continuity analysis in 2008 on the basis of the situation at the end of 2007, when the funding ratio was 140 per cent. The results of this analysis were in line with those of the 2007 continuity analysis. Given the serious deterioration in the financial position since then, the 2008 continuity analysis does not provide an accurate view of the actual risks and expectations for the long and medium term. The continuity analysis has been updated in the context of the recovery plan. The Minister of Social Affairs and Employment will evaluate the parameters for continuity analyses at the end of 2009. Recovery plan Having operated since the end of 2008 with both a reserves shortfall and a funding shortfall, ABP has drawn up a recovery plan showing how it expects to eliminate the shortfalls within the statutory periods. This recovery plan, which is currently being considered by the regulator, is discussed in greater detail in Chapter 6.
    • 41 Annual Report 2008 ABP Required capital Standard model for required Under the Financial Assessment Framework, the required capital is the capital needed to capital adequacy avoid a funding shortfall, such that the fund will have sufficient resources in one year’s time to meet its unconditional pension liabilities. This is defined by law in terms of a 97.5 per cent probability, i.e. a 2.5 per cent or lower risk of a funding shortfall in one year’s time. The Minister of Social Affairs and Employment has defined a standard test of capital adequacy as part of the Pensions Act regulations. This measures the possible (adverse) effect on capital, in euros, of a number of risk factors. The results of the standard test depend on market conditions and the investment risk profile, and can therefore fluctuate over time. The risk factors measured in the standard test are: S1. Interest rate risk S2. Equities and alternative investments risk S3. Currency risk S4. Commodities risk S5. Credit risk S6. Underwriting risk Effects S1–S6 are measured with reference to prescribed shocks. They are then combined using a predetermined formula to give the total effect on capital adequacy, taking into account that not all risks are incurred simultaneously (i.e. the effect of diversification). According to the standard method, a pension fund’s capital satisfies the requirement if its general reserve exceeds the figure produced by the formula. At the end of 2008, ABP’s required capital was calculated at 23.6 per cent (€ 45.5 billion). Minimum required capital The fund’s minimum required capital is put at 4.4 per cent of the liabilities (€ 8.4 billion).
    • Pierre Janssen (1926-2007) was the first art expert to appear on Dutch TV. Already establis- hed as a journalist and museum director, he rose to fame as a TV presenter fired by missionary zeal to stimulate interest in the arts. He hosted Kunstgrepen, the first arts programme on Dutch TV, which ran from 1959 to 1972. It attracted an audience averaging two million per broadcast and around a hundred programmes were made. He next hosted a programme entitled Openbaar Kunstbezit, through which he could convey his enthusiasm for art to the viewers. His audience was captivated by the tall, slim figure, the emo- tions he displayed and his expressive hands. He was able to focus their attention on the works he admired, occasionally breaking with the conventional style of presentation, such as the time he presented the programme with an inverted chair on his head. Some art experts were not impressed, accusing him of demysti- fying art and making it accessible to the hoi polloi. We have come a long way since Pierre Jans- sen’s pioneering TV arts programmes. Culture channel Nederland C just failed in 2009 to recruit the number of members needed for access to the public network, but is now broadcasting on Amsterdam channel AT5. People like Pierre Janssen devote their whole lives to raising the public’s awareness of the Pier r e Jan ssen beauty of art. It can take restorers up to nine months to make just one painting fit to be put on display. Pioneering arts presenter, host of Kunst­ grepen, the first arts programme on Dutch TV (1959­1972).
    • 43 Annual Report 2008 ABP Nine months on a single painting Marion Bosc, an independent painting restorer, once spent around nine months working on a single painting. It was a painted panel from the 16th century, where the panels had become detached and so a lot of paint lost. Hundreds of tiny holes had to be carefully filled one by one. “And then it really takes a long time to finish the job,” she explains. Marion Bosc is French by birth and trained as a painting restorer at the Sorbonne University in Paris. After graduating she spent three years gaining experience of various techniques in countries such as Canada (modern art), Egypt (paintings on Pharaonic temples and statues), Italy and the Netherlands. Her university studies also included an internship at the Stedelijk Museum in Amsterdam, where she built up a wide-ranging network of contacts in the art world. These subsequently resulted in an offer for her to come and work in Amsterdam, where she has lived since 1996 and has her own studio. She works for some fifteen Dutch museums, as well as auction houses, art dealers and private collectors. As well as restoring paintings, she also inspects the condition of paintings before and after exhibitions and examines complete collections. Lots of waiting The time Marion takes to complete an assignment can vary from a few days to a whole year or more. Inspections of complete collections – the Stedelijk Museum’s collection, for example, comprises some six thousand paintings – can take a particularly long time. Each work has to be checked very carefully and everything the restorer sees gets entered into a database. Dealing with an individual painting can also take a long time, either because of its size or its location (if it is on a ceiling, for example) or because the restorer has to wait a long time between each stage of the restoration work. As she explains, “If a canvas has become deformed over a period of many years, we cannot get it flat again in one go as that would make the paint crack. And sometimes we remove a thick, dark layer of varnish and discover abnormalities in the paint layer below. If it’s not clear whether these were done by the artist or, for example, during a previous restoration, we have to investigate before we can go any further.” “Generally, art collections in the Netherlands are well looked after,” says Marion. “The climatic conditions here are difficult, and moisture is one of the major risks. But the country invests a lot of money in preserving its cultural heritage.”
    • 44 Annual Report 2008 ABP Recovery plan Introduction Having operated since the end of 2008 with both a reserves shortfall and a funding shortfall, ABP has drawn up a recovery plan pursuant to Sections 138 and 140 of the Pensions Act showing how it expects to eliminate the shortfalls within the statutory periods. The recovery plan was adopted in March 2009 after the Participants’ Council had given a positive recommendation and the Employers’ Council a negative recommendation. The Employers’ Council took the view that a contribution surcharge would only be acceptable if accompanied by some retrenchment in entitlements. DNB has still to approve the plan. The financial policy it imposes will prevail until the shortfalls have been eliminated. Under ABP’s current contribution rate, indexation and investment policy and on the basis of the interest rate and return expectations employed, the funding ratio will recover within five years from the shortfall (funding ratio below 104.4 per cent) as at year-end 2008. Against this background, the Board of Governors decided to apply, as permitted pursuant to the Decree of the Minister of Social Affairs and Employment of 4 March 2009, for extension of the period allowed for recovery from the funding shortfall from three to five years. After consultation with the employers’ and employees’ organisations, the Minister of Social Affairs and Employment set out in detail the conditions for a recovery period of five years in a letter to the President of the Dutch House of Representatives. In particular, the first date of mandatory implementation of a decision to reduce pension entitlements proposed during the recovery period was deferred until 1 January 2012. The Board of Governors of ABP will take this revision of the ministerial rules into account at the annual recovery plan evaluation dates. The extension of the recovery period is also subject to further conditions. In particular, the recovery plan must state the action to be taken if it is found during the recovery period that the recovery is not progressing as expected and the minimum capital requirement is unlikely to be met by the end of the recovery period. In the light of the development of the funding ratio since the end of 2008, ABP’s Board of Governors does not consider it justifiable to wait and wishes to use the full period of five years for the recovery process. The Board of Governors has therefore decided to take concrete measures this year to increase the pension fund’s recovery capacity. These measures will significantly increase the probability of the funding ratio actually exceeding 104.4 per cent within five years and will reduce the need for additional interim measures. Given the development of the fund’s financial position, additional interim measures may of course become inevitable. The measures in question are indicated in the recovery plan, but it is difficult to quantify their extent in advance. The ultimate decision will depend not only on knowledge of the precise extent of the financial problems, but also on how the various economic parameters develop and their implications for the fund’s recovery capacity. If and when such decisions are taken, the Board of Governors will carefully balance their effects on employers, employees, former participants and pensioners.
    • 45 Annual Report 2008 ABP In weighing all these factors, the principal objective of the Board of Governors will be to devise a coherent policy that both provides solutions to short-term issues and offers the prospect of long-term recovery. The Board of Governors therefore takes the view that work must continue, after submission of the recovery plan, on restoring the pension fund to structural health. Financial position At the end of 2008, ABP’s nominal funding ratio was 89.6 per cent, which means that the available resources on that date amounted to 89.6 per cent of the value of the nominal liabilities, based on the assumptions defined by the law. As at 31 December 2008, therefore, there was both a reserves shortfall and a funding shortfall. The recovery plan is designed primarily to rectify the funding shortfall. Funding shortfall Pursuant to Section 131 of the Pensions Act, the minimum required funding ratio is 104.4 per cent. As at year-end 2008, the funding shortfall was 14.8 percentage points (104.4 – 89.6), which equates to a shortfall of € 28.4 billion. Reserves shortfall Pursuant to Section 132 of the Pensions Act, the required funding ratio as at 31 December was 123.6 per cent. As at year-end 2008, the reserves shortfall was 34.0 percentage points (123.6 – 89.6), which equates to a shortfall of € 65.5 billion. Policy during the recovery period Contributions policy ABP bases the cost-covering contribution rate on a prudent expected real return of 3.0 per cent, consisting of a conservatively estimated long-term-nominal return of 6.1 per cent and expected wage inflation of 3 per cent per year. Indexation policy Above a funding ratio of 104.4 per cent, an indexation matrix is applied. The upper limit of this matrix is 135 per cent, which means that, in principle, partial indexation is granted at a funding ratio between 104.4 and 135 per cent. The Board of Governors has the authority to depart from the indexation matrix. In principle, if the funding ratio is below 104.4 per cent, i.e. if there is a funding shortfall, no indexation is applied. Based on the financial position on the reference date of 1 November 2008, ABP’s Board of Governors decided not to apply indexation as from 1 January 2009. Full indexation for 2009 would have been 4.73 per cent, consisting of the average pay increase in 2008 in the public and education sectors (approximately 3.2 per cent) and part of the pay increase for 2007 which, because of the timing of signature of the collective labour agreement, could not be included in the indexation for 2008 (approximately 1.5 per cent). The decision not to apply indexation as from 1 January 2009 avoided a further decline in the funding ratio of approximately 4 percentage points. Investment policy Investment policy is currently being guided by the 2007-2009 strategic investment plan. ABP is working in 2009 on a new strategic investment plan for the period 2010–2012, taking into account a range of factors such as the balance of risk and return, ABP’s long- term indexation ambition, the fund’s recovery capacity and the present and predicted economic environment. Other measures ABP’s Board of Governors is aware of the significant uncertainties surrounding the fund’s planned path to recovery, given the unpredictable depth and duration of the current economic crisis and its future direction, whether up or down. The fund’s ability to realise its indexation ambition for the pension scheme in the short and medium term is also giving
    • 46 Annual Report 2008 ABP the Board of Governors cause for concern. In the final analysis, the Board of Governors will do all in its power to prevent the erosion of pension entitlements. In the light of the uncertainties surrounding the fund’s path to recovery, the sharply diminished prospect of indexation and its determination to prevent erosion of pension entitlements, ABP’s Board of Governors has approved a package of additional measures to increase the fund’s recovery capacity. This package of measures is additional to the withholding of indexation as from 1 January 2009. The measures to be taken at the start of the recovery plan comprise: – Modification of the risk profile of the investment portfolio. The risk profile was altered slightly in the 2009 investment plan to reduce the risk of a downside departure from the recovery plan. The investment policy will be finalised for the coming three-year period in 2009. – Addition of a recovery surcharge to the cost-covering contribution rate for the retirement and surviving dependants’ pension scheme (OP/NP) for civilians and military personnel during the period of funding shortfall. This surcharge is 3 percentage points, of which 1 percentage point will apply as from 1 July 2009 and the full 3 percentage points as from 1 January 2010. The Board of Governors will make a judgment in late 2009 as to whether the expected improvement in the financial position for the remainder of recovery period justifies reduction or suspension of the recovery surcharge. – Investigation of the possibility of funding the temporary recovery surcharge in advance for a period of five years (or other forms of one-off capital injection), so that it can contribute immediately to increasing the fund’s assets. The Board of Governors will closely monitor developments in the fund’s financial position. A revision of the framework for assessing the relationship between the assets and liabilities of pension funds may emerge from the study of the long-term sustainability of the pension system, which includes evaluation of the Financial Assessment Framework, and the recommendations of the Parameters Committee. Such a revision may affect the develop- ment of ABP’s funding ratio and hence the fund’s progress towards recovery. Recovery faster than With the package of measures described above, the Board of Governors has improved the envisaged chances of faster recovery from the funding shortfall. Once the funding shortfall has been eliminated, the Board of Governors will assess each year the scope available in relation to the indexation matrix for an additional contribution to the realisation of the pension fund’s indexation ambition and, if indexation is to be applied, whether on a one-off or structural basis depending on the level of the current funding ratio. Recovery slower than If, despite the measures that have been taken, the fund’s powers of recovery are not envisaged sufficient to eliminate the funding shortfall within the remaining recovery period, the Board of Governors will take additional measures to ensure that recovery is achieved within the remaining period. Such measures might include raising the temporary contribution rate surcharge and reducing pension entitlements. The precise extent of these potential additional measures depends on the actual financial situation, the economic outlook, the applicable regulations and parameters and the choices made by the government and employers’ and employees’ organisations. The Board of Governors takes the view that a balance would need to be struck between raising the temporary contribution rate sur- charge and reducing pension entitlements so as to spread the burden evenly over all stakeholders: employers, employees, pensioners and former participants.
    • 47 Annual Report 2008 ABP Predicted financial position Funding shortfall With the financial policy described, including the recovery surcharge, it is expected that the funding shortfall will be eliminated in about four years. Without the recovery surcharge on the contribution rate, the minimum required funding ratio of 104.4 per cent would be achieved in approximately 4 years and 8 months. The temporary recovery surcharge will therefore shorten the recovery period by around eight months. Figure 6.1. Predicted funding ratio: first five years 110% 105% funding shortfall limit 100% 95% 90% base trend 85% base trend + contribution rate surcharge 3 years 4 years 5 years 08 09 10 11 12 13 Reserves shortfall Recovery from the reserves shortfall is expected to take 12 years and 9 months. The lower risk profile shortens the period by approximately 8 months and the recovery surcharge on the contribution rate also reduces it by about 8 months. The predicted funding ratio is shown graphically in figure 6.2. Figure 6.2. Predicted funding ratio 140% indexation matrix upper 130% reserves shortfall limit 120% 110% funding shortfall limit 100% 90% base trend 80% 5 years base trend + contribution rate surcharge 15 years 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23
    • 48 Annual Report 2008 ABP Table 6.1 shows the expected development of the funding ratio, based on wage inflation of 3 per cent. Table 6.1. Predicted funding ratio After 3 years After 5 years After 15 years Average funding ratio 100% 107% 128% Monitoring ABP’s financial position will be closely monitored during the recovery period, with regular reporting. If the recovery of the fund’s financial position is significantly slower than envisaged in this recovery plan, the Board of Governors will first determined whether the delay will extend the recovery period beyond the permitted time. If it is likely that the recovery period will be extended to such an extent as to exceed the maximum periods of five and 15 years, respectively, the Board of Governors will consider additional measures as described in the recovery plan. In that situation, a new recovery plan will drawn up on which the Parti- cipants’ Council and the Employers’ Council will be asked to give their recommendations. In principle, if the fund’s financial position improves faster than envisaged in this recovery plan, higher indexation will be applied in accordance with the indexation matrix and the recovery period will be shorter. If the funding ratio improves faster than expected, the Board of Governors may decide to apply higher indexation than that indicated by the indexation matrix. Communication After adoption of this recovery plan, the employers, participants and pensioners will be informed in a personal letter of the basic outlines of the plan and its consequences for indexation. ABP will publish the funding ratio monthly on its website while the funding shortfall persists. The fund will also publish regular updates on its financial position via press releases. If further deterioration of the financial position, as outlined above, makes additional measures necessary, the participants will be informed.
    • 49 Annual Report 2008 ABP Risk management This chapter deals with the risks to which ABP is exposed as a pension fund and its policy for managing those risks. Quantitative information on the risks and the sensitivity of the funding ratio can be found in the section on risk in the financial statements. Risk management Risk management ABP has always given high priority to risk and risk management, but the many internal and a high priority external developments are making good internal management even more important. In response to factors such as changes to legislation and regulations, more complex business processes, tighter regulation and an increasingly discerning client base, ABP must ensure that both the risks to which it is exposed and its organisation are managed as effectively as possible. Given the turbulence on the financial markets and the frequent legislative changes, this is by no means a sinecure. The Board of Governors took the following steps in 2008 to strengthen ABP’s risk management: – The Board of Governors engaged external consultants in 2008 to advise on ABP’s ex-ante risk management and control functions as implemented after the separation of the pension fund from the administrative organisation. – The Board of Governors approached risks from a strategic perspective by conducting assessments within risk workshops, thereby not only fulfilling its statutory task, but also explicitly identifying the risks that are relevant to the fund’s day-to-day operations and the measures that can be taken and improvements made in response to them. – An Executive Office was set up in 2008 to ensure effective monitoring of the admi- nistration and risk management functions. In the coming year, the Executive Office will focus inter alia on placing the assessment of the fund’s risk management on a more independent footing. – Outsourcing risk increased in 2008 following the separation of the pension fund from the administrative organisation. To limit this risk, a system of contracts was negotiated comprising a master contract, subsidiary contracts and a service level agreement (SLA) for the coming year. The Board of Governors monitors the functioning of the contractual arrangements on the basis of status reports and checks. – One of the tasks of the Audit Committee is to supervise the functioning of the risk management and control systems. To improve internal supervision, the Board of Governors decided in 2008 to expand the Audit Committee by adding three external members. – The Investment Policy Committee formed by the Board of Governors consults on a regular basis with the external investment committee, thereby bringing the latter closer to the Board of Governors which it assists in the role of an external advisory committee. – The credit crisis occupied much of the Board of Governors’ attention in the second half of 2008, and particularly in the last four months. Many more meetings have been held by the Board of Governors, the Investment Committee and the external investment com- mittee and the reporting frequency has been raised. – While the long-term strategic aim of investment policy remains largely unchanged, corrective action has been taken where necessary in response to the credit crisis. For example, the Board of Governors has made several tactical changes to lower the risk profile to some extent. Good asset and liability management and raising risk-awareness were accordingly high on the agenda. The pension fund has asked the pension administrator to continue with the
    • 50 Annual Report 2008 ABP development of an in-control statement. ABP also intends to make a series of recommendations to listed companies. Risk management Control and management of the various risks are organised into three processes, which in organisation principle cover all the various risk categories (macro, meso and micro). In the interests of functional segregation, it is important that responsibility for the three processes is not borne by one person. – Ex-ante risk management: this relates to the formulation of risk policy and the development of risk-measurement frameworks and instruments. This process is top- down. – Monitoring and reporting (risk control): the second process relates to embedding risk management in the organisation, i.e. coordination of policy implementation and setting standards for the organisation of the processes and activities. Risks are also measured and risk reports produced for ex-post risk management. This process is generally more bottom-up, but also includes top-down supervision of the effect of the macro frame- works on the subsequent levels in the organisation. – Internal and external control: the third process is internal supervision, with first-line supervision by the Board of Governors of both ex-ante risk management and risk control and actual risk management by the pension administrator, which provides ABP with a quality statement in respect of this control. The Audit Committee, the external auditors, the external actuary and the external regulators (DNB and the Authority for the Financial Markets) also play an important role. ABP’s risk management model is represented schematically in Figure 7.1 Figure 7.1. Risk model Board of Governors Ex-ante risk policy Internal and external control macro management supervision risk control meso Process design micro Monitoring Reporting Asset and liability Asset and liability management (ALM) is one of the main tools used to determine the fund’s management strategy, and in particular its financial policy. The ALM model is used to examine and mana- ge assets and liabilities in a coordinated manner, by analysing the effect on the fund’s finan- cial position of a large selection of economic scenarios. This analysis covers the develop- ment of the liabilities, the investment policy and the contribution rate and indexation policy as they specifically relate to ABP’s situation. The ALM model is used to prepare for policy decision-making and regular testing of financial policy on the basis of a continuity analysis. The recovery plan is also based on a (new) continuity analysis. In addition, the ALM model is
    • 51 Annual Report 2008 ABP used to develop the annual investment plan and the three-year strategic investment plan and a modified version of the ALM model, tailored specifically to the short term, is used in the assessment of the risk profile for the investment portfolio. The purpose of ALM is to find a combination of contribution rate, indexation and investment policy that is appropriate to: – the fund’s liabilities, taking into account future indexation (which is conditional but to which the fund aspires); – an attractive and stable contribution rate; – the statutory frameworks for the assessment of the financial position and the formulation of the financial policy. Although the financial policy ultimately adopted must take account as far as possible of the expected trend in the liabilities, it still inevitably involves some risk. The various risks asso- ciated with the financial strategy are jointly referred to as the ‘mismatch risk’. The general reserve acts as a buffer against this mismatch risk. In addition, the Actuarial and Business Memo states that indexation and, where applicable, the contribution rate and the com- position of the investment portfolio will react to changes in the financial position. These mechanisms imply that, if necessary, risks can be transferred to participants, former participants, pensioners and employers. Risk analysis Identified risk categories The risks identified by ABP fall into two categories: financial and non-financial risk. The non-financial risks, which are risks that directly or indirectly impede the fund in its operations, are strategic risk, outsourcing risk and compliance risk. The financial risks, which are those that arise from the fund’s specific activities, are interest rate risk, investment risk, underwriting risk, indexation risk and liquidity risk. These risks and the measures in place to manage them are discussed below. Non-financial risks Strategic risk Strategic risks are risks which may prevent the achievement of the strategic objectives. Political decision-making and the situation on the financial markets are just two of the many factors contributing to strategic risk. For ABP, it is essential to preserve a collective pension system, based on solidarity, which offers flexibility. This is vitally important to the various categories of participants, because collectivity and solidarity mean that pensions remain affordable, risks are spread, the prospects of full indexation are improved and costs are kept down. ABP believes that further expansion will help it to achieve these objectives. Emphasising the contrasts or differences between young and old or between sectors may be prejudicial to support for the collective scheme based on solidarity and could therefore present a strategic risk. The collective pension system is based on solidarity. ABP pursues a long-term funding policy which seeks to apply full indexation while maintaining a stable and affordable con- tribution rate. If large groups or sectors leave the scheme, it may disturb this long-term policy. Because this may have adverse effects for the participants remaining with the scheme, ABP applies financial conditions on exit from the scheme. One of these con- ditions is that the group exiting the scheme is charged for underwriting loss. ‘Underwriting loss’ refers to the effects on the contribution rate of the departure of a group of, for example, relatively young participants.
    • 52 Annual Report 2008 ABP A strategic plan is drawn up every three years (in 2009 for the period 2010–2012) and the strategic priorities are evaluated and, if necessary, updated every year. Strategic priorities are then adjusted in the light of external developments and new ideas evolved within ABP. Outsourcing risk Outsourcing risk is the risk of harm to the continuity, integrity and/or quality of activities that are outsourced to third parties. ABP has outsourced the administration of the pension scheme, which includes policy preparation, pension administration, communication and asset management. For ABP, the outsourcing risk is primarily the risk of the administrative organisation not acting in accordance with its mandate. To enable management of this risk, which relates to operational activities, the terms and conditions have been contractu- ally defined and are embodied in an SLA. Under the contract, the administrative organisati- on undertakes to represent ABP’s interests properly and to the best of its ability and to exercise the care that may be expected of a competent service provider acting reasonably. As sole shareholder in the administrative organisation, ABP can exercise sufficient authority to manage this outsourcing risk. Under the mandate, the administrative organisation outsources part of the investment management function to specialised asset managers. The risks associated with this outsourcing are managed preventively, via an intensive selection process. The administra- tive organisation subsequently checks that the chosen specialists consistently comply with the administrative organisation’s requirements in terms of inter alia quality, expertise and quality of service. - pension fund management For the pension scheme, complete information and efficient processing are essential if the rights accrued by the individual participants, the pension benefits paid and the contributi- ons received from the affiliated employers are to be accurately recorded. This information is also the basis of communications with participants, such as the uniform pension overview (UPO). According to the administration regulations, this information is to be delivered in the form of returns. Each month, the administrative organisation checks on behalf of the fund that all the returns have been received and are complete, accurate and realistic. The fund pursues an active policy on collection of contribution arrears. Interest is charged if contributions are underpaid or paid late. The actual payment procedures are protected by a system of preventive measures, including civil status and change-of-circumstance registers and an online link to the municipal personal records database (GBA), which ensures that the address is up to date and that payment of pension terminates promptly when the pensioner dies. - asset management The outcome of the ALM studies determines the desired investment mix and the actual investment transactions undertaken to achieve it. Transactions are governed by rigorous procedures. Each day, the administrative organisation coordinates the liquid investment positions between external asset managers, custodians and investment administration. This enables daily checks to be made on the permitted risk positions, with due regard for the regulations of the relevant regulatory bodies. All transactions in illiquid investments are checked in detail in advance, to ensure continuity and consistency in the investment process.
    • 53 Annual Report 2008 ABP PricewaterhouseCoopers has issued SAS70 type II statements for a number of the administrative organisation’s processes, confirming their effective functioning. - financial reporting ABP places great value on internal management in the preparation of financial reporting. The fund’s financial reports are prepared by the administrative organisation, which has organised its internal risk management and control systems in accordance with the COSO ERM framework. The internal management systems guarantee the reliability of both financial administration and reporting. The administrative organisation renders account for its administration and management in quarterly reports and the annual report. The administrative organisation conducts reviews of the quarterly reports and the audit of the annual report by the external auditors. Material audit findings and progress with improvements instituted in response to those findings are reported to and discussed with the Audit Committee. Compliance risk Compliance risk is the risk of harm to ABP’s image in the event of non-compliance with internal and external standards and values or legislation and regulations. ABP has appointed a Compliance Officer to monitor compliance and has expressly imposed compliance requirements on the administrative organisation. The main compliance risks relate to implementation of the Pensions Act, the Sectoral Pension Fund (Obligatory Participation) Act 2000 (Wbpf) and the Personal Data Protection Act (Wbp). Financial risks Interest rate risk Interest rate risk is the risk to the funding ratio of movements in interest rates. The fixed- income investments, the pension liabilities and, albeit to a lesser extent, the other assets and liabilities are sensitive to fluctuations in market interest rates. The interest-rate risk depends on the extent and average maturity of the fixed-income investments and the pension liabilities. Around 40 per cent of the fund’s investments in the strategic mix are directly sensitive to movements in the interest rate, as are the total pension liabilities because they are valued at market interest rates. The duration of the pension liabilities is also considerably longer than the duration of the investments in fixed-income securities. As a result, falls in interest rates have an adverse impact on the fund’s financial position. Limiting this risk in 2008 required active balance sheet management, taking into account ABP’s views on the outlook for interest rates. The fixed-income investments have become slightly more sensitive to falls in interest rates compared with the benefits accruing from rises in interest rates. The net result was an increase in the duration of the portfolio of fixed-income securities compared with 2007. Under the 2009 investment plan, the dura- tion will be extended further to ten years. Although the interest rate risk in nominal terms is still high, ABP does not consider it desirable to hedge it, given the fund’s real return target and the current low market interest rate. Hedging this nominal risk would mean anchoring the current low interest rate levels in the portfolio for longer. An unexpected increase in inflation and the nominal market interest rate could then not be absorbed and, without further measures, could lead to devaluation of the fixed-income investments and possibly a reduction in the return.
    • 54 Annual Report 2008 ABP Investment risk In addition to the interest-rate risk, which affects the value of the fund’s liabilities and fixed- income investments, ABP is also exposed to an additional risk in respect of its invest- ments: investment risk. This comprises various specific risks: the equities and alternative investments risk, the currency risk, the commodities risk and the credit risk. These risks, and the interest-rate risk and the underwriting risk, are included in the standard model prescribed by the Financial Assessment Framework to determine whether a pension fund has sufficient capital. The equities and alternative investments risk relates to the risk of a fall in the value of investments in equities and real estate. On the basis of the ALM, ABP has opted for a strategic investment mix that allocates around 60 per cent of its investments to equities and alternative investments in 2009. This mix is expected in the longer term to generate the real return that is needed to ensure that contributions remain affordable and the fund can realise its indexation ambition. The risks in equities and alternative investments are primarily managed by ensuring that investments are spread over a wide range of assets, regions, categories and sectors. In order to diversify its risks, ABP invests considerable sums in foreign currencies. These investments expose the fund to currency risks because it has to pay its pensions in euros. These risks are, however, limited as most of the exposure to the major currencies (chiefly the US dollar) is hedged with derivatives. The credit risk is the risk of a debtor being unable to meet its payment commitments. In exceptional cases, the principal may not be repaid or the debtor may be declared insolvent. To manage this risk, the investment portfolio is spread widely over regions, sectors and individual debtors and an appropriate risk premium is required. ABP requires the administrative organisation to maintain a professional internal credit analysis department at all times. Underwriting risk The underwriting risk includes the risk of negative results on the actuarial assumptions that are used to determine the technical provisions. The most important risk in this respect is the development in life expectancy rates. Retirement and surviving dependants’ pensions are lifelong pensions and the longer participants and former participants live, the higher the provision for pension liabilities needs to be. ABP therefore takes account of the life expec- tancy rates of its participants, former participants and pensioners in determining the liabili- ties. The life expectancy rates are derived from survival probabilities. These survival proba- bilities, which constitute part of the actuarial principles, are based on ABP’s pension records and take into account future trends according to projections by Statistics Nether- lands (CBS). The survival probabilities and expected trend are reviewed every three years and adjusted if necessary. For surviving dependants’ pensions, the ‘partner frequency’ is an important risk factor. This actuarial assumption refers to the number of cases in which a surviving dependants’ pension is granted when a participant or former participant dies. The more participants or former participants who leave surviving dependants, the higher the cost of surviving dependants’ pensions and the higher the provision for pension liabilities needs to be. In addition to retirement and surviving dependants’ pensions, the pension regulations also provide for transitional supplements. These relate to the conversion from the provisions under the Public Servants Superannuation Act (WPA) to the ABP pension regulations when ABP was privatised in 1996. ABP does not always know before retirement whether there is entitlement to benefit under a transitional arrangement, so an estimate of future liability for
    • 55 Annual Report 2008 ABP these benefits has to be made on the basis of the benefits paid to the current generation of pensioners. With changing work and cohabitation patterns on which these benefits are calculated, the estimate of future liabilities in respect of these benefits is subject to some uncertainty and is therefore a risk factor in determining the provision for pension liabilities. Indexation risk Wage inflation and general wage increases work through to the provision for pension liabilities via indexation. Wage inflation is therefore a significant factor for the fund in that it is a factor in the decision by the Board of Governors on indexation. The Board of Gover- nors’ discretionary powers to decide whether and to what extent indexation is applied in any year is one way in which this risk is controlled. Liquidity risk The liquidity risk is the risk that the fund will have insufficient cash to meet its current payment liabilities, including pensions for existing pensioners. As the sum of contributions, direct investment income and redemptions of fixed-income investments exceeds the sum of pension benefits and expenses by a wide margin and the fund also has a high percen- tage of its investments in liquid financial instruments, the risk to pension benefits of a liquidity shortfall is limited. Investing in illiquid asset classes brings the risk of the fund being less flexible when it comes to periodically reweighting the investment portfolio. In the case of derivatives or securities lending, there may be a contractual obligation to make additional payment. This risk was greater than normal in 2008. In-control statement ABP’s Board of Governors is responsible for the fund’s financial position and hence for the existence, configuration and functioning of the internal risk management and control sys- tems. The purpose of these systems is to monitor progress towards achievement of the pension fund’s strategic, operational and financial targets, to facilitate reliable financial reporting and to identify and limit the risks taken by the pension fund and the external risks to which it is exposed. The internal risk management systems are also designed to ensure compliance with the relevant legislation and regulations.The assessment of the configurati- on and functioning of the fund’s internal risk management and control systems is discus- sed periodically by the Audit Committee of the Board of Governors. The internal risk management systems are designed to identify and control risks. They cannot, however, guarantee that the strategic, operational and financial targets will actually be achieved. Nor can they guarantee that all risks, errors and instances of fraud will be identified or prevented, nor that the relevant legislation and regulations will be complied with in all cases. ABP’s Board of Governors stresses that, by the nature of the pension fund’s activities, some risks are beyond its control, for example demographic changes, wage inflation and developments on the financial markets. Where necessary and possible, measures have been taken to minimise the impact of those risks. In the belief that it is ultimately in the fund’s interest, ABP has deliberately chosen to pursue a long-term risk policy. This means that short-term risks may (temporarily) have a greater adverse effect than if the funds had opted for a short-term risk policy. Last year, in which ABP separated from the administrative organisation, is seen as a year of transition in which ABP took a number of measures to improve the management of the fund’s risks, some of which did not take effect until 2009. Those which took effect in 2008 included the SLA entered into with the administrative organisation and the creation of the Executive Office. For that reason, ABP’s Board of Governors largely bases its assessment of the past financial year on the in-control statement received from the Board of Directors of the administrative organisation.
    • Bonsai fanatic Iemitsu Tokugawa was a powerful man in seventeenth-century Japan. As the third shogun in the Tokugawa dynasty, he was effectively the sole ruler. The emperor had no power: he was kept a ‘golden prisoner’ at his court in Kyoto. Shogun Iemitsu ruled from Edo, as Tokyo was formerly known. Under his leadership, the shogunate attained the peak of its power. Iemitsu is at rest in the Tokugawa family temple, guarded by spirits including Jikokuten, the god of thunder. Iemitsu was devoted to gardening, and in particular growing bonsai trees. He spent so much time gardening that it sometimes brought him into conflict with those around him. His favourite tree was a pine, said to be close to 200 years old when he acquired it. He was so fond of the tree that he assigned three atten- dants to its care and protection. The senior steward, who was ultimately responsible for the tree’s welfare, was paid between three and five times the normal stipend. Iemitsu also made provision for the tree to continue to receive preferential treatment from future emperors for centuries after his death. The Imperial Palace’s collection of trees suffered j ikokut en badly in World War II from the shortage of water and fertiliser. After the war, it took more than a decade in some cases to restore the trees to God of thunder, guardian of the health. family temple of the Tokugawa Iemitsu’s pine tree, one of Japan’s national dynasty (1603–1867). treasures, is still in the Imperial Palace in Tokyo. It is now over 500 years old.
    • Six years to get a bonsai ready for sale Iwan Roos cultivates and trades bonsais in Schoonhoven. Literally translated, a bonsai is simply a tree in a pot. Bonsais have been cultivated in Japan for hundreds of years, while the oldest bonsai that Iwan has grown himself is now ten years old. It usually takes around six years before a bonsai is ready for sale. Even as a young child Iwan was fascinated by all sorts of plants and flowers, but it was a visit to the miniature town of Madurodam that triggered off his obsession with the bonsai. He was given some empty ground behind his parents’ home and started growing trees there to use for bonsais. “You need lots of patience,” he explains. “You plant the little tree in the soil and it’s another six years before you can sell it. These days I can get two to three-year-old saplings from growers in Boskoop, and that makes a big difference.” Importance of good composition Although you can make a bonsai from any type of tree, some species are more suitable than others. Iwan cultivates most of his bonsais from domestic species such as juniper, pine, lilac, hawthorn and various types of elm. It is important for the plant to have small leaves and thin branches. “The bonsai needs a good composition,” he explains. “The crown of the tree needs to be one third of the breadth of the pot, for example. That is the standard in Japan, where they have really got the cultivating of bonsais down to a fine art. Some family businesses have bonsai trees that are hundreds of years old. The Japanese government has now banned exports of those trees to the West. There was a time when we bought up everything we could find there: a rapid reduction in the Japanese beauty heritage.” Also beautiful from behind Iwan sells his bonsais on the internet and also at horticultural markets in spring. Every week he sends plants, carefully packaged in boxes, to clients throughout the Netherlands. He does not take much account of what ‘the client’ thinks is an attractive bonsai. “I grow what I personally think is beautiful,” he says. “The branch structure has to be fine and compact, and the various ‘levels’ of the tree have to fit together. In effect, you have to create a sort of waterfall. There has to be a flowing movement in the structure of the branches. The tree also has to be beautiful from behind so that you create a three-dimensional image. People sometimes forget about the back of the tree. And as far as I’m concerned, those are poor-quality bonsais.”
    • 58 Annual Report 2008 ABP The administrative organisation has been working on an ‘in-control’ project in recent years which has created the foundation for the risk management function. This foundation and the in-control statement, SAS 70 statements and periodic reports by the management of the administrative organisation provided a sufficient basis for the Board of Governors’ own in-control statement in that year of transition. Where processes have been outsourced, these risks are managed by the administrative organisation. The outsourcing risk to which ABP is exposed is managed by periodic reporting by and consultation with the administrative organisation. ABP’s Board of Governors has found no evidence that, in so far as they relate to financial reporting on processes that fall within the scope of the service agreement between ABP and the administrative organisation, the internal risk management and control systems were not properly organised and did not function effectively in 2008. Internal risk management systems have also been implemented within the administrative organisation to manage the strategic, operational and compliance risks relating to the realisation of ABP’s objectives in so far as administration has been outsourced by ABP. Progress was also made in 2008 in implementing the internal risk management and control systems relating to the administrative processes that have not been outsourced.
    • 59 Annual Report 2008 ABP Pension fund management Pension scheme developments Changes to pension The employers’ and employees’ organisations participating in the Pension Chamber regulations reached agreement in 2008 on a number of administrative and operational changes to the ABP scheme, including: – provision of cover for under-65 partner pension from age 62 in the case of unemployment; – greater flexibility in exchanging partner pension for retirement pension; – payment of death benefit to third parties without evidence; – terminating deduction in respect of simultaneous service for two partner pensions; – pension inception date other than the first of the month. These changes will be implemented in future updates to the ABP regulations. The employers’ and employees’ organisations participating in the Pension Chamber also reached agreement on the relaxation of the anti-cumulation provisions of the flexible pension and early retirement benefit scheme (FPU). This change to the FPU regulations relates to the government’s efforts to make it more attractive for former teachers to return to teaching on a part-time basis. The pension base for the ABP disability pension (AAOP) was also debated in the Pension Chamber, but the employers’ and employees’ organisations were unable to reach agree- ment in 2008 and the issue of the AAOP pension base has been brought before the Advisory and Arbitration Committee. The ‘64 years and 11 months issue’ with regard to the FPU scheme was also discussed at length in the Pension Chamber last year. The debate centred on the less than 100% actu- arially based calculation of the interest rate for participants working beyond the reference age under the FPU transfer arrangements and on making (partially) unconditional the cur- rent conditional entitlement to buy into the ABP scheme. This debate did not result in any changes to the scheme in 2008. Communication with participants and employers Communication of After publication of the recovery plan, the outlines of the plan and its consequences for recovery plan indexation were explained to employers, participants and former participants by personal letter. ABP will publish the funding ratio each month on the website for the duration of the funding shortfall. The fund publishes regular updates on its financial position via press releases. Policy for communication Communication with the participants and employers is via three marketing and communication with participants and concepts, based on ABP’s mission, that have been developed and tailored to suit each target employers group (active participants, pensioners and employers) for use in all relevant communication channels. For active participants, these are the uniform pension overview (UPO) and the MijnABP internet environment. For pensioners, MijnABP is combined with the annual pension summary and itemised payment records. For the employers, the service level agreement (SNO) concept is combined with the EASINet website. The objective is to provide the participants with a better overview, insight and outlook via all communication channels (internet, telephone, e-mail, post, group presentations, individual interviews). The concept for employers seeks to relieve them of the worry of fulfilling their pension promise to their employees and make it easier for them to do so.
    • 60 Annual Report 2008 ABP A significant feature of this strategy is that participants are approached partly directly but also, and increasingly, via the employer. This combination makes approaches to and communication with the client more effective, because participants prefer to go to their employer first if they need pension information. High score for ABP in ABP scored 88 per cent in the most recent transparency survey conducted by Market transparency survey Response in the context of the new Pensions Act, which came into force on 1 January 2007, placing ABP in the ‘excellent’ category. This signifies that the fund’s communications are sufficiently transparent and no plans to improve transparency are needed. Internet use still The internet is the main channel employed in ABP’s communication strategy, because it is growing ideally suited to meet the growing demand by participants for a more ‘self-service’ approach. Both the open abp.nl site and the secure and personalised MijnABP environment are being continuously expanded with new functionalities and access and navigation are the subject of constant improvement. What is important, is for the participant to be able instantly to find the information he or she needs and to compute projections for a wide variety of personal situations. The number of visits to the websites is growing all the time. The number of visits to the abp.nl general website increased to 2.2 million in 2008 (2007: 1.7 million). An important feature of the site is the search function, which last year helped 75 per cent of users to find satisfactory answers to their questions immediately – a high score in the internet world. The number of visits to MijnABP also continued to grow, to around 900,000 a year (2007: 800,000). Visitors gave the sites a score of 7.4. The number of e-mails in 2008 showed little change from the year before, at 91,000. Another main element in ABP’s direct communication with participants is the digital newsletter. That the newsletter is meeting a growing need among participants is evident from the rapid growth in the number of subscribers to 155,000 (2007: 66,000). Telephone still an important Notwithstanding the growing use of the internet, the telephone is still an important commu- communication channel nication channel. After falling from 420,000 to 347,000 in 2007, the number of calls to the call centre rose sharply again in 2008 to 372,000. Calls concerning the separation of the pension fund from the administrative organisation and questions about the pension fund growth factor (factor A), which participants need for their tax returns, accounted for most of this increase. The number of calls was especially high in the early months of the year, demonstrating the effectiveness of the pension fund’s policy of actively approaching and informing participants via high-quality communication, which provides considerable added value especially in times of crisis. Despite the growth in the number of calls, access to the call centre remained high at over 98 per cent and the average time a client had to wait before reaching an agent fell to 21 seconds (2007: 26 seconds). In 93 per cent of cases, the call centre dealt with the client’s call itself and referred the call to the second line (back office) in only 7 per cent of cases. Reflecting this performance, the call centre’s client satisfaction score improved to 7.8 (2007: 7.5). In December 2008, the call centre was named the most responsive call centre in the Netherlands in an independent survey by Customer Contact Company.
    • 61 Annual Report 2008 ABP Growing demand for Alongside the internet and the telephone, personal contacts are also growing in importan- individual interviews ce. Over 11,200 individual interviews were held with participants in 2008 (2007: 6,100), both at the employer’s site and at ABP’s regional offices. The value participants place on these interviews is reflected in their satisfaction score of 7.7. Employer is most important As well as approaching participants directly, ABP is also increasingly communicating with intermediary for contact them through their employer. It is, after all, the employer that makes the pension promise with participants to the participants. There are a number of channels available to ABP for communicating with employers. One of the communication channels with employers is the EASINet website, in the secure section of which they can access the Employers’ Mirror (Werkgeversspiegel), which pro- vides relevant information from the ABP databases. By year-end 2008, a total of over 4,000 employers had bought 9,900 subscriptions to the EASINet site. Meanwhile, the advice desk handled over 31,000 telephone calls and e-mails from employers. The most important form of contact with the employers is still personal contact via the employers’ advisers. Around 6,600 face-to-face meetings were held in 2008, at which the advisers helped employers with issues such as pension-awareness, application of the new Pensions Act, active aging and developments in social security and agreement was reached on the services to be provided by ABP. Another useful aid that was developed in 2008 is the ‘argument cards’ to help both employers and employees make pension decisions. The employers are very enthusiastic about this new tool. ABP also talks to employers about current developments in the field of pensions and social security at the Pension Day events and regional days and in network meetings and presen- tations. ABP still receives a high 7.5 score from the employers. Developments in service level Service improved The online transaction facilities available to the client via MijnABP were upgraded in 2008. via MijnABP These improvements, which relate to applications for the FPU benefit and the ABP KeuzePensioen, take the form of both easier access and navigation and expanded functionality. The projection calculations for various exit options have been augmented with net calcu- lations and the pension figures are displayed in clear graphs, so that the simulations provide maximum transparency and optimum insight into the client’s pension situation. In the process, MijnABP has developed increasingly into an online personal pension file, not just for people who are accruing pension, but also for pensioners wishing to consult their itemised payment records and annual pension summary. Higher CEM service score ABP’s strategic goal is to provide its clients with the best service in the pension fund world. An important measure is the service score relative to the CEM benchmark, a global pension fund benchmark compiled under the auspices of the CEM (Cost Effectiveness Measurement) Institute in Toronto.
    • 62 Annual Report 2008 ABP CEM improved the service scoring method in 2008 by reflecting current developments in pension fund management more closely. For example, website-based service to partici- pants has been accorded a more prominent place in the CEM service score. In table 8.1, the scores for previous years have been recalculated by CEM using the new method. Table 8.1. Service score (max. = 100)* 2008 2007 2006 2005 2004 ABP 89 88 84 80 77 CEM World – average tba 68 70 69 68 12 largest funds – world average tba 71 69 68 68 Netherlands – average tba 69 71 72 67 Under CEM’s new 2008 service scoring method, ABP achieved a total service score in 2008 of 89 points on a scale of 1–100, placing ABP at the top of the CEM world bench- mark. ABP’s position relative to all 77 participating funds will not be known until the summer of 2009, when the 2008 benchmark results are published. The slightly higher service score in 2008 reflects improvements in several client processes. At the call centre, the average waiting time has fallen to 21 seconds and e-mails are being dealt with more quickly. Improvements in the advice service at various locations also contributed to the higher CEM service score. The service to employers was improved in 2008 by agreeing service plans with the majority of that group. The service score was also helped by expediting inward and outward value transfers. All these improvements can be attributed mainly to structural improvements in processes. Front-office client Table 8.2. Front-office client satisfaction satisfaction shows little change 2008 2007 2006 2005 2004 Call centre 7.8 7.5 7.5 7.4 7.4 Employer advice 7.7 7.6 7.5 7.6 7.9 Regional days 7.4 7.7 7.7 7.5 7.5 Internet (ABP website) 7.1 7.1 7.1 - - The Employee Call Centre’s excellent performance in 2008 raised the score for its front- office services to 7.8 (2007: 7.5). Client satisfaction with the employers’ advisers also improved, while that for the general abp.nl website showed no change. MijnABP’s client satisfaction score was 7.4. Possibly due to the less flamboyant presentation, satisfaction with the regional days was slightly lower, at a still acceptable 7.4. Back-office client satisfaction Client satisfaction with the back-office services was higher in 2008 across all client groups, higher across the board as shown in table 8.3.
    • 63 Annual Report 2008 ABP Table 8.3. Back-office client satisfaction 2008 2007 2006 2005 2004 Early retirement 8.0 7.9 7.7 7.7 7.8 Pensioners 8.2 8.1 8.1 8.1 8.1 Active participants 7.2 7.1 6.8 6.8 7.0 Special Ministry of Defence schemes 7.9 7.7 7.6 7.5 7.6 The improvement in client satisfaction among early retirees reflects the improved service relating to the FPU award process. The quality of the award process (relating to retirement pension) was also responsible for a further improvement in the already high client satisfac- tion score among pensioners. The positive rating for the handling of information requests and value transfers was responsible for the higher client satisfaction score among active participants. The score for the uniform pension overview improved in 2008 to 7.4 (2007: 7.2). Appeals as barometer The activities of the Appeals Committee are also an important barometer of the quality of of service quality ABP’s service, because it is the Appeals Committee to which clients have recourse in the last instance. The number of appeals lodged in the context of the pension regulations and their outcome are analysed in Table 8.4. Table 8.4. Number of appeals 2008 2007 2006 2005 2004 Lodged 132 138 155 213 186 Withdrawn 41 57 51 80 60 Inadmissible 4 5 11 7 3 Committee unauthorised to rule - - - 2 - Upheld 87 91 129 119 119 Overturned 7 5 10 9 26 Hearings 14 15 23 22 18 Developments in pension administration expenses Higher CEM cost To maintain and strengthen its leading position on the Dutch pensions market, ABP has made additional investments in raising the standard of information and communication technology and improving communication with participants and employers. The focus has been on adapting the processes and systems to keep pace with the advances in techno- logy and raising the standard of service reliability and continuity. Higher standards of com- pliance and internal management are also required as a consequence of the more rigorous regulatory framework.
    • One of the first, most striking and most poetic environmental speeches was delivered in 1854 by Chief Seattle of the Suquamish Indian tribe living in the north-west of the United States. It was under his leadership that the Suquamish came into contact with the white man. Seattle gave his famous speech in reply to a request from Governor Stevens, who wanted to buy Seattle’s land and move the tribe to designated reservations. If we do not own the freshness of the air and the sparkle of the water, how can you buy them? Seattle told Stevens that the earth, air, water and animals were like brothers and sisters to the members of the tribe. He explained, in a mixture of florid language and plain speaking, that the white man had no respect for them and were driven by greed and material gain. This we know: the earth does not belong to the white man, the white man belongs to the earth. He treats his mother, the earth, and his brother, the sky, as things to be bought, plundered and sold. Some tribes sold their land and others refused, but by 1858 their resistance had been broken and the last of the tribes gave in. To this day, CH IEF Seat t le they have not been paid for their land. Seattle lives on in the Suquamish Museum in the town of the same name, where he has pride of place. Delivered one of the first environmental Many countries have signed up to the Kyoto speeches in 1854. climate accord since it was drafted in 1997. The United States has still not signed, but Pre- sident Obama has said that the accord and its consequences will be given serious consideration again.
    • Forty years to generate clean, sustainable energy By 2050 solar power, wind power and sustainable biomass will be able to meet most of our energy requirements. Until then we will have to rely primarily on gas. Coal-fired and nuclear power stations can be phased out in the meantime, and no new power stations should be built. That is the energy scenario put forward by Greenpeace, as Hans Altevogt, the leader of Greenpeace Nederland’s energy transition campaign, explains. “Our ‘Energy [R]evolution’ scenario demands large-scale investment in energy-efficiency measures and sustainable energy solutions. The country’s overall energy bill will also be substantially lower because renewable energy is free. Our scenario shows it is perfectly feasible to stop investing in coal-fired and nuclear power stations,” he claims. Energy problem resolved The Greenpeace scenario is clearly based on a comprehensive solution. On the one hand it involves implementing a series of energy-efficiency measures. “We can certainly reduce our energy consumption considerably,” says Hans. “In our view, there’s still a lot we can achieve in that way.” On the other hand, the solution also includes various sustainable energy options. “We are campaigning for large wind farms to be built in the North Sea. Now more than ever is a good moment to bring these investments forward. By linking the wind farms in the United Kingdom, Norway, Denmark, Germany, the Netherlands and Belgium to each other in a supergrid, we can ensure a constant supply of wind energy. And if we can then link this system to the concentrated solar power parks in North Africa and Southern Europe, we will have solved our energy problem, which is now primarily a fossil fuel problem, for good.” A lot obviously needs to happen before we reach that stage. In the meantime, gas is the most flexible source of energy: the ideal transitional fuel. According to Hans Altevogt, “Experts say that we have enough gas, certainly until the end of this century. Natural gas stocks will soon run out, but there is also gas from biomass and liquefied natural gas, which we can import from countries such as Qatar and Algeria. Huge amounts of gas still also get wasted, for example, on heating homes that haven’t been insulated.” Taking on the challenge of the future The horizon in Greenpeace’s energy scenario is around 2050, by which time all the coal-fired and nuclear power stations can have been phased out. The interim milestones include 2015 (which is when global CO2 emissions are expected to peak and then subsequently need to fall substantially) and 2020 (by which time CO2 emissions need to have been reduced by 40 per cent). As Hans comments, “The year 2050 seems far away, but it is no further away than 1970. That’s why we need to get down to work now!”
    • 66 Annual Report 2008 ABP These investments are reflected in ABP’s higher cost per participant. Table 8.5. Pension administration expenses per participant (€) 2008 2007 2006 2005 2004 ABP 90 74 65 63 62 CEM Q1 – world tba 59 62 59 60 CEM world – median tba 79 77 78 85 CEM Q1 – Netherlands tba 78 86 79 62 CEM median – Netherlands tba 93 97 92 83 The sharp increase in the administration expenses to € 90 per participant in 2008 reflects the cost of the additional investments in ICT, compliance and internal management and communication with participants and employers. Part of the increase is also due to the cost of outsourcing ABP’s administration, which includes a risk surcharge, to APG. Despite this rise in the cost per participant, ABP still measures up to the other pension funds in the benchmark, taking into account the contractual service level. Compared with the 2007 benchmark results, ABP is still below the median cost per participant for the peer group of Dutch pension funds that are relevant to ABP. The CEM cost figures for 2008 will be available in mid-2009.
    • 67 Annual Report 2008 ABP Investment management Valuation of the investments Current values fraught ABP measures its investments at current value employing a rigorous and reliable process with uncertainty as defined in a valuation manual. The valuation manual sets out the valuation policy and principles and specifies the methods and techniques by which they are to be applied. In order of priority, ABP uses the following methods for measuring the carrying amounts: 1. Mark-to-market (market quotation) 2. Broker quotes 3. External estimates and appraisals 4. Mark-to-model 5. Best estimates Measurement is only tried using an inferior method if a superior method proves impracticable. Given the market conditions, the valuation of (illiquid) investments is fraught with uncertain- ty. The sting is in the tail. The markets were extremely volatile in 2008, especially in the last four months of the year, and low transaction volumes can have a relatively large impact on prices. Where there is no market for an asset class and other information is limited, valuati- on is based on best estimates. In a number of cases, it has been necessary to use best estimates to value illiquid investments in particular. Investment returns Investment return Figure 9.1 shows the cumulative return, both nominal and real, since early 1993. Every -20.2 per cent € 100 invested in 1993 had grown by 31 December 2008 to € 251. The average annual return has been 5.9 per cent. The return after actual wage inflation (real return) over the period has been 3.7 per cent. Figure 9.1. Returns 1993–2008 (cumulative) 350 300 nominal return real return 250 3% notional prudent real return 5.9% 200 3.7% 3.0% 150 100 year-end 1992=100 50 0 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
    • 68 Annual Report 2008 ABP As the graph shows, although the disappointing results in 2008 have had a significant impact on the long-term return, the real return is still well above the notional 3 per cent used to calculate the cost-covering contribution rate. The primary causes of the negative return were the global crisis on the credit market, the uncertainty on the financial markets and the sharp price falls in most asset classes. ABP’s underlying returns are shown in table 9.1. Table 9.1. Returns on investment portfolio in 20089 (in percentages and billions of euros) 2004 - 2008 2007 2008 gewicht in (5 jaar) porte- % € mrd % € mrd % € mrd feuille Fixed-income investments 14.8 10.3 1.9 1.6 0.4 0.3 44.8 Equities and alternative investments (excluding hedge funds) 9.4 7.8 5.2 5.6 -36.5 -44.9 49.0 Equities -1.9 -0.6 5.3 3.9 -39.4 -33.3 32.4 Real estate and real-estate funds 32.8 5.9 -9.4 -2.0 -30.0 -6.3 8.6 Infrastructure 55.6 0.3 21.0 0.3 -3.1 -0.1 1.7 Private equity 79.9 2.5 29.4 1.6 -24.5 -2.4 4.0 Commodities -15.4 -0.2 31.0 1.8 -46.2 -2.8 2.3 Other investments (mainly hedge funds) 38.3 1.7 14.2 1.0 -5,7 -1.3 6.5 Overlay (including duration) 0.5 1.4 -0.5 -0.8 1.0 1.8 -0.3 Total 14.2 21.2 3.8 7.5 -20.2 -44.1 100 As table 9.1 shows, ABP added almost € 21 billion of investment results to capital in the space of in five years, despite the credit crisis in 2008. Net contributions and benefits in the same period amounted to € 2.1 billion. In 2008, 85 per cent of the investments in US dollars were hedged against the euro. Investments in UK pounds and Australian and Canadian dollars were 100 per cent hedged against the US dollar. The exchange result on the investments was offset by the strategic hedging of these currencies. The total return on the strategic currency hedge in 2008 was 0.4 per cent negative. The 4.9 per cent negative return due to the strengthening of the US dollar was largely offset by the weakening of the above currencies against the US dollar. As well as strategic hedging of the various currencies, the interest-rate sensitivity of the pension liabilities has been partially hedged by extending the duration of the fixed-income portfolio. This had a positive effect on the return for 2008 of around 1.8 per cent. 9 Including allocation of hedging and exchange results
    • 69 Annual Report 2008 ABP Investment portfolio results Negative investment The 20.2 per cent negative return was largely the product of the strongly negative returns return on equities and alternative investments. In equities, the developed markets (–36 per cent) performed less badly than the emerging markets (–50 per cent). In the developed markets, which account for over 80 per cent of the equities portfolio, financial services (–54 per cent), basic materials (–49 per cent) and industrials (–48 per cent) were worst hit by the credit crisis and the falling oil prices. Despite the higher risk profile, private equity (–25 per cent) generated a better return than equities. With bank lending virtually at a standstill, the return on real estate was also sharply lower (–30 per cent). After an extremely good first half (+42 per cent), commodities ended the year with a 46 per cent negative return due to the abrupt fall in oil prices in the second half. Performance One of the references against which ABP’s return for 2008 is compared is the norm portfolio return, based on regular market benchmarks, which is determined in advance by ABP’s Board of Governors. ABP aims to outperform the norm portfolio through active investment management. Having achieved this consistently in recent years, ABP underperformed the norm portfolio in 2008, with an actual return of 20.2 per cent negative, which was 4.8 percentage points lower than the norm portfolio. It should be noted, however, that the balance of the actual return and the return on the norm portfolio for 2008, together with the outperformance achieved in the past five years, is still positive. The 4.8 per cent underperformance relative to the benchmark was due to several factors. The most significant of these was the use of an absolute benchmark (generally an inter- bank interest rate plus surcharge) for the illiquid investments, when those investments have in fact generated a negative return (accounting for approximately 2.5 percentage points of the underperformance). There was also an unrealised loss on the securities len- ding reinvestment programme (accounting for approximately 1 percentage point of the underperformance) and credits were overweighted within the fixed-income securities port- folio (accounting for around 1 percentage point of the underperformance). Due to over- weighting in the portfolio, there were losses on the prices of a number of specific Dutch bank shares which were heavier than those sustained by the benchmark (accounting for around 0.5 percentage points of the underperformance). Lastly, underperformance of approximately 1 percentage point was due to active investment decisions because the market prices of the underlying securities collapsed. This was compensated by active decisions on interest rates that achieved positive performance of more than 1 percentage point. Top ten investments per Tables 9.2, 9.3 and 9.4 show ABP’s top ten investments10 in equities, real estate and fixed- asset class income securities, with the positions in 2007 in the second column. The totals are consistent with those in the company balance sheet. 10 More information can be found at www.abp.nl
    • 70 Annual Report 2008 ABP Table 9.2. Top ten equities investments 2008 2007 € million in % 1 (1) Exxon Mobil Corp 671 1.2 United States 2 (3) Koninklijke Philips Electronics NV 635 1.2 Netherlands 3 (2) Royal Dutch Shell Plc 464 0.9 Netherlands 4 (-) Nestlé SA 430 0.8 Switzerland 5 (-) Total SA 406 0.8 France 6 (8) ING Groep NV 402 0.7 Netherlands 7 (-) Allianz SE 394 0.7 Germany 8 (-) Bayerische Motoren Werke AG 347 0.6 Germany 9 (-) GlaxoSmithKline PLC 343 0.6 United Kingdom 10 (-) Roche Holding AG 314 0.6 Switzerland Total for top ten equities investments 4,406 8.1 Total equities portfolio 54,339 100.0 Table 9.3. Top ten real-estate investments 2008 2007 € million in % 1 (1) Vesteda 1,523 8.4 Netherlands 2 (2) Corio NV 794 4.4 Netherlands 3 (3) Unibail-Rodamco 743 4.1 France 4 (-) Steen & Storm 420 2.3 Norway 5 (6) Simon Property Group Inc 338 1.9 United States 6 (9) Vornado Realty Trust 291 1.6 United States 7 (-) Public Storage 276 1.5 United States 8 (-) ING DOF 272 1.5 Netherlands 9 (-) Sonae Imobiliaria ERRA Fund 220 1.2 Portugal 10 (-) Westfield 218 1.2 Australia Total for top ten real estate investments 5,095 28,1 Total real-estate portfolio 18,167 100.0 Table 9.4. Top ten fixed-income investments 2008 2007 € million in % 1 (1) France (government bonds) 10,631 11.6 France 2 (2) Italy (government bonds) 7,213 7.9 Italy 3 (3) Federal National Mortgage Association (Fannie Mae) * 6,118 6.7 United States 4 (4) United States (government bonds) 4,135 4.5 United States 5 (5) Federal Home Loan Mortgage Corporation (Freddie Mac) * 2,982 3.3 United States 6 (6) Germany (government bonds) 2,770 3.0 Germany 7 (7) Netherlands (government bonds) 1,724 1.9 Netherlands 8 (8) Greece (government bonds) 1,579 1.7 Greece 9 (-) Government National Mortgage Association (Ginnie Mae) * 1,156 1.3 United States 10 (-) Bank of America Corp 984 1.1 United States Total for top ten fixed-income investments 39,292 43.0 Total fixed-income portfolio 91,572 100.0 * secured on collateral
    • 71 Annual Report 2008 ABP Developments in the financial markets The year 2008 was dominated by the continuing and deepening credit crisis that started back in the summer of 2007. Underlying fears of a worldwide recession progressively took hold during 2008, while the policies announced or implemented by governments became increasingly radical during the final months of the year. Whether these policies will ultimate- ly prove enough and sufficiently timely to stabilise the financial system and the economy and ward off a long-lasting and painful recession was the main question facing investors at the end of the year. Although governments seem willing to do everything they can and in principle have access to a wide range of policy instruments, the chances of success in the near future still seem far from certain. The economic news in 2008 was dominated by bank balance-sheet problems, interest rate cuts, government intervention, sharp contractions in economic activity, rising credit spreads and fear and volatility on the financial markets. Returns on almost all equities and alternative investments were highly negative, and even illiquid, more complex investments lost substantial amounts of value. Liquid government paper was one of the few investment categories yielding positive returns for the year as a whole. Commotion in the banking Many banks were hit hard in 2008 by the credit crisis, which resulted in takeovers, govern- sector ment injections of capital and even insolvencies. Banks’ balance sheets were weakened by substantial losses on their positions in low-quality mortgage-backed securities, while share prices of financial institutions fell sharply and losses continued to rise. The banking sector’s problems really reached a peak in September 2008, when the fourth largest US bank, Lehman Brothers, was forced to file for bankruptcy protection. This caused an almost complete loss of counterparty confidence in the financial system, with major interbank markets coming more or less to a standstill. As banks are at the hub of the economic wheel, these problems have had far-reaching consequences. Firstly, signs of risk aversion became increasingly evident, not least among banks themselves. Credit became difficult to find, despite central banks around the world cutting interest rates in an effort to encourage lending. Owing to higher risk margins, however, these interest rate cuts have not translated into lower interest expense for businesses and consumers. Lending conditions became stricter during the year, while banks remained extremely cautious about lending to each other and interbank interest rates were relatively high. Indeed, it was not until October 2008 that any signs of a slight fall in rates started being seen. Central banks around the Concerns about the economy and financial instability have prompted central banks all world seek to boost liquidity around the world to cut their interest rates substantially, as well as trying other ways of maintaining lending. Lending to banks, for example, has risen significantly in recent months, thanks to relaxations in lending conditions and the acceptance of wider-ranging forms of collateral. The Federal Reserve has even started directly purchasing the commer- cial paper that many businesses use to fund their immediate and other short-term borro- wing requirements, while also announcing plans to buy mortgage-backed securities issued by Fannie Mae and Freddie Mac and acting in conjunction with the US government to res- cue the world’s largest insurance company, AIG, from collapse.
    • 72 Annual Report 2008 ABP Governments announce Governments in the United States, United Kingdom, continental Europe, Japan and China support measures have also been actively involved in trying to stave off recession. The most substantial initiative so far has come from the US Ministry of Finance, which approved a USD 700 billion rescue package in October. Although the financial markets initially responded positively to this plan, it has not resulted in a turn-around and nervous sentiment continues to dominate the market. In Europe, the credit crisis resulted in a number of banks having to be nationalised, including the Dutch parts of Fortis and ABN AMRO. In an effort to ward off recession, various countries have since announced stimulus packages to provide capital injections for banks and businesses in need of funding. As a result, budget deficits all around the world have risen. Serious pressure Growth in the United States slowed substantially in 2008, and this has since turned into a on US economy recession. Fears of a deep recession increasingly took hold in the second half of the year. The rapid rise in unemployment is putting additional pressure on the economy, as are the sharp falls in consumer and business confidence levels. There have also been more and more signs of a significant decrease in inflation and indeed growing fears of deflation. In other words, a continuing fall in general price levels. The housing market remains weak, with prices falling sharply and a significant reduction in construction activity levels. Europe in recession Having recorded two successive quarters of negative growth, Europe is now officially in recession, although the relative rise in unemployment has so far been less pronounced than in the United States. The fall in inflation has prompted concerns about possible deflation, with the combination of falling oil prices and recession continuing to push inflation down. Equities reach new lows Equity markets have been hit hard by the credit crisis. Stock exchange indices were volatile in 2008, with many equities in industrial and emerging countries losing half their value. Sharp falls in profits were initially seen primarily in the financial sector, but non- financials also started experiencing problems during the course of the year and price- earnings ratios fell throughout the world. Risk aversion in lending The credit crisis also had an impact on the fixed-interest market, where high demand for triggers flight to quality quality bonds triggered falls in interest rates on many state bonds. Yields to redemption on 10-year eurozone state bonds fell to 2.95 per cent at the 2008 year-end, compared with 4.3 per cent at the start of the year. The flight to quality and liquidity even resulted in negative interest rates on short-term US treasuries in December, while demand for interest rate swaps increased substantially. On the other hand, risk premiums on both investment-grade and high-yield bonds rose sharply, partly because of the general aversion to risk, but also the perceived rise in the risk of bankruptcies and insolvencies. Spreads between corporate and state bonds meanwhile rose to record levels. High volatility of Oil prices were extremely volatile in 2008. The combination of initially strong worldwide alternative investments economic growth, primarily in the emerging markets, and the limited supply pushed oil prices up to a record high of USD 140 a barrel in the summer, with commodity invest- ments yielding exceptionally high returns in the first six months of the year. The turn-around came in the subsequent months, when signs of a sharp slowdown in economic growth became increasingly evident. Oil prices closed the year at USD 44.60 a barrel, which meant highly negative returns on commodity investments.
    • 73 Annual Report 2008 ABP The high volatility seen in equity markets was also reflected in the share prices of listed real-estate companies, which fell sharply in value during the year. Returns on securities lending in 2008 were clearly negative. Although the returns on hedge fund investments were also negative, the losses were limited in comparison with the relevant benchmarks, primarily thanks to our continuing focus on minimising the systematic risk in the specific portfolios. Composition of the investment portfolio Considerable change in ABP’s investment mix has changed considerably in recent decades, as table 9.5 shows. investment mix Table 9.5. Composition of the investment portfolio including derivatives (before consolidation / in percentages) (in %) Plan 2009 2008 2005 2000 1990 1980 1970 Fixed-income investments 40 44.8 43.2 49.6 87.9 95.5 96.3 of which index-linked bonds 9 8.3 4 - - - - Equities and alternative investments 52 49 53.6 50.4 12.1 4.5 3.7 Equities (including participating interests) 32 32.4 37.2 39 5.3 0.2 0.4 Real estate 9 8.6 10.7 9.9 6.8 4.3 3.3 Infrastructure 3 1.7 0 - - - - Private equity 5 4 3 1.5 - - - Commodities 3 2.3 2.7 - - - - Other investments 8 6.5 3.2 - - - - Hedge funds 6 5.8 3.2 - - - - Innovation 2 0.7 - - - - - Cash - -0.3 - - - - - Total 100 100 100 100 100 100 100 The effects of the changes in the investment mix on the relationship between investment results and contributions are shown below. Total investments (in € billion) 173 191 150 74 37 10 Investment result (in € billion) -44.1 21.2 3.6 5.4 2.6 0.5 Contribution (in € billion) 6.6 6.7 3.1 2.0 3.7 1.2 Progress of 2007 – 2009 strategic investment plan The strategic investment plan for 2007 – 2009 set three objectives: – configuring a new strategic portfolio – developing a new investment framework – implementing innovative strategies. Strategic portfolio weightings The various developments in the financial markets are one of the reasons why we have at 2009 levels been able to achieve the new strategic portfolio more rapidly than expected. ABP now has a portfolio that is largely in line with the required strategic weightings, partly because of the falls in the value of many listed investments.
    • 74 Annual Report 2008 ABP New investment framework The investment framework envisaged in the second objective is structured around the two core tasks of pension fund investments: achieving the real returns required to ensure that the pension scheme remains affordable and managing the risks inherent in the pension liabilities. The main elements of this approach were examined in detail during the year. Essentially this involves a different way of viewing the role of the investment categories in the strategic mix, with the different categories being assigned a place in either the growth portfolio or the income portfolio. The growth portfolio seeks to achieve returns that are on average high, but variable, while the income portfolio is designed to achieve returns that are on average low, but more certain. This framework will form the basis of the 2010 – 2012 strategic investment plan. In response to the credit crisis the Board of Governors has started an internal evaluation of the investment policy and the management of the organisation. One of the conclusions reached is that the existing primary processes and systems have in any event worked well and that the continuity of the ICT systems has proved its worth. Any need that the Board of Governors identifies for adjustments in the strategic investment policy will be incorporated into the 2010 – 2012 plan. This plan will also examine the confi- guring of investments in terms of the returns generated net of inflation and the establishing of appropriate benchmarks, risk profiles and investment horizons. Focus on innovation yields The third objective in the 2007 - 2009 strategic investment plan is to implement innovative tangible results investment strategies. ABP firmly believes that there are benefits to be gained by leading the market in financial developments. We consequently attach great importance to innova- tion and sought during the year under review to develop and encourage the creativity, knowledge and expertise of employees in the administrative organisation. And this has produced demonstrable results. A total of ten innovative investments were implemented in the period to the end of December 2008. Capital totalling € 1.9 billion has been made available for these investments, and € 1.4 billion of this has so far been allocated. Ethical investments Ethical investments – in other words, integrating environmental, social and corporate governance (ESG) responsibilities as broadly as possible into investment activities – is of fundamental importance to ABP. The 2007 – 2009 strategic investment plan has set an ambitious objective in this respect. Details of the new policy on ethical investments, which was adopted in December 2007 and implemented during 2008, can be found on www.abp.nl. Integration into day-to-day Sustainability (environmental and social issues) investment processes The main purpose of the policy on ethical investments is to ensure that investment decisions take ethical factors into account. These include issues such as climate change, child labour, human rights and health and safety. The policies pursued by companies in which ABP invests are analysed and assessed against this criteria before any decision to invest in a company proceeds. Wherever necessary, ABP asks companies for additional information. The issues investigated in 2008 included: – planned EU legislation on vehicle CO2 emissions; – the future of a European system for trading emission rights; – the pharmaceutical industry’s ability to help improve access to health care in developing countries; – opportunities for investing in solar power. We also started analysing sustainability issues arising from our investments in fixed-interest
    • 75 Annual Report 2008 ABP securities, real estate, infrastructure and commodities (including forestry and agriculture). These areas cover issues such as the efficient use of energy in buildings, working conditions on building sites, expropriations of land for development purposes and the implications that biofuel production and mining have for people and the environment. ABP has decided to conduct these analyses systematically for all investments in these categories from 1 January 2009 onwards. Our private equity partner Alpinvest has its own policy on socially responsi- ble entrepreneurship, and this is in line with ABP’s policy on ethical investments. Entering into a dialogue One of the important elements of our policy on ethical investments is our commitment to with companies enter into a dialogue with companies to discuss their performance from an environmental and sustainability perspective. ABP expects all the companies in which it invests to operate in accordance with the United Nations Global Compact.11 The following table lists some of the companies that we met in 2008 to discuss activities that could conceivably fail to comply with the environmental and social standards we have set. Company Issue Action taken Progress Anglo American (UK) Relocation of a community and Personal meeting with the company in London. The company has assured ABP that it is seeking to resolve the pollution of water supplies in Letter sent to the board chairman. issue of the community and that it will improve the procedures South Africa applying in the case of future relocations. Daewoo International Human rights relating to the Personal meeting with the company in Seoul. The company has published new information on its website about (South Korea) planned construction of a gas Various exchanges of e-mails. The dialogue is its policy on the environment and various social issues, as well as pipeline in Burma ongoing. providing ABP with additional information on the action it is taking to prevent abuses of human rights. Freeport-McMoRan Effects on the environment and Personal meetings with the company in New The company has shown a willingness to enter into a frank and (USA) human health of waste- Orleans and London. One conference call, two open dialogue. In December 2008, ABP submitted a shareholder’s processing activities at the letters to the board chairman and numerous resolution to the Freeport AGM that is to be held in June 2009, Grasberg mine in Indonesia exchanges of e-mails. asking the company to appoint an environmental specialist to the ABP has entered into an alliance with the board. Swedish state pension funds AP1, AP2, AP3 and AP4, and also with pension funds in New York. The dialogue is ongoing. Total (France) Human rights in Burma Personal meetings with the company in Paris A good dialogue has been established with the company. ABP is and Amsterdam. Various exchanges of e-mails. seeking to establish whether the company is taking the measures Visit to Burma in December 2008 to view the needed to ensure that its activities do not involve any human rights company’s activities. The dialogue is ongoing. abuses. Final conclusions will be drawn in 2009. Wal-Mart (USA) Labour conditions for employees Personal meeting with the company in The company has agreed to publish further information on its Bentonville (USA). ABP is working with PGGM employees’ satisfaction levels. and other investors in this case. The dialogue is ongoing. Vedanta (UK/India) Consequences for the Personal meeting with the company in London. The company totally rejects all allegations of adverse effects on the environment and local Letter sent to the company. The dialogue is environment and society. communities of a bauxite mine ongoing. planned in Orissa (India) ABP is working with PGGM and USS (UK) on this case. Companies active in Human rights ABP has worked with a group of investors to Progress has been achieved in establishing a dialogue with the Sudan encourage the companies to provide information companies. Additional information on their activities has been on the precautionary measures taken to ensure obtained. their activities are not associated with violations of human rights. The dialogue is still ongoing. In addition to the dialogues it maintains with individual companies, ABP sometimes also focuses on groups of companies or governments. The administrative organisation has, for example, worked with other investors under the UN banner to encourage some 9,000 companies worldwide to subscribe to the United Nations Principles for Responsible Investment and to support the United Nations Global Compact. 11 www.unglobalcompact.org/AbouttheGC/TheTENPrinciples/index.html.
    • 76 Annual Report 2008 ABP Firm policy on Another example of the ethical investment policy is the membership12 of the European climate change Institutional Investors Group on Climate Change (IIGCC), which involves participating in, for instance, discussions on measures designed to deal with climate change. In December 2008, the IIGCC, together with its sister organisations in the United States (Investor Network on Climate Risk) and Australia and New Zealand (Investor Group on Climate Change), published a joint statement in the form of the Investor Statement on a Global Agreement on Climate Change.13 This statement outlined what investors expect of worldwide policy on climate change. The signatories to the statement represent some 150 investment institutions, with total assets under management of over USD 9,000 billion. The statement was published at the time of the UN conference on climate change in the Polish city of Poznan, where governments set out to negotiate climate policy for the future. As an investor, ABP has an interest in consistent government policies as sudden changes can affect the value of existing investments in areas such as renewable energy. In order to ensure that future investment opportunities remain attractive in the longer term, it is also important that the nature and scope of existing schemes do not change too often or too much. Other activities relating to climate change include the administrative organisation’s involve- ment in the Carbon Disclosure Project (CDP), which is an international network that encourages companies to report on their greenhouse gas emissions and the risks and opportunities that climate change represents for their businesses. In 2008, ABP provided financial support for extending the CDP to companies in the Netherlands. Human rights In relation to child labour, we established a basis for dialogue with a group of companies by writing to over 250 of them and calling on them to adopt policies on human rights. This initiative, which was launched alongside the events organised to mark the sixtieth anniversary of the Universal Declaration of Human Rights, was designed to support a project set up by Mary Robinson, previously the UN High Commissioner for Human Rights.14 Investing in sustainable As part of its policy on ethical investments, ABP invests in renewable energy, clean solutions technologies, sustainable forestry and microfinance. The new investments made in 2008 included investments in: – the Koegorspolder wind farm in the Zeeuws-Vlaanderen region of the Netherlands, where 22 wind turbines generate electricity for 35,000 households and so save 120,000 tons of CO2 compared with an equivalent coal-fired power station; – a biomass power plant in Belgium generating power for commercial greenhouses in the vicinity; – a large solar power station in Castilla-La Mancha, Spain; – a waste-fuelled power station in Kansas City, USA;15 – a USD 140 million commitment to provide finance to various funds making micro-credits available in large numbers of developing countries. 12 ABP’s administrative organisation is a member of the IIGCC. 13 www.iigcc.org/docs/PDF/Public/InvestorPolicyStatement8Dec08.pdf. 14 www.realizingrights.org/?option=content&task=view&id=351. 15 These four investments were made in 2008 by infrastructure funds to which ABP had given commitments in previous years.
    • 77 Annual Report 2008 ABP Exclusion policy ABP does not invest in companies directly involved in manufacturing landmines, cluster bombs or chemical or biological weapons. The Board of Governors reviewed this policy in 2008 and decided that no changes were currently required. The number of companies on ABP’s exclusions list in 2008 totalled 16. The review of the list at the end of the year resulted in three companies being removed because fresh investigations showed that they were no longer involved in manufacturing landmines or cluster bombs. Four companies were added to the list during the year. The full list of exclusions for 2008 and 2009 can be found on the website. Corporate governance Corporate governance means more than just good governance of an enterprise; it also comprises a process. In other words, the way in which companies’ management and shareholders, each operating within their own spheres of responsibility, deal with each other in order to optimise long-term shareholder value. These relationships cannot be recorded contractually as this would curb the freedom that is an essential part of entre- preneurship. Corporate governance consequently demands efforts and commitment from both sides. ABP recognises how important good corporate governance is for a long-term investor such as itself and so takes its responsibilities as a shareholder very seriously. During 2008, ABP continued seeking to integrate corporate governance into its investment policy by, for example, exercising the rights it has as a shareholder in respect of infor- mation and control. The policy on corporate governance includes: – in principle exercising voting rights in respect of all the companies in which ABP invests;16 – entering into a dialogue with companies in which ABP has a substantial stake or where issues of special relevance to shareholders arise outside the general meeting; – seeking to recover losses if non-economic factors result in a fall in the value of an investment (the financial crisis meant this aspect demanded greater efforts in 2008 than in previous years). ABP also strives in liaison with other institutional investors, both in the Netherlands and abroad, to optimise the functioning of equity markets and corporate governance through consultations with local and international regulators and supervisory authorities. Examples of such consultations in 2008 included the discussions with the German Ministry of Finance, when ABP sought to persuade the Ministry, following a number of unusual transactions, to refine the rules applying when controlling interests are acquired in listed companies. In Sweden, ABP asked the supervisory authorities to investigate the equal treatment of shareholders in takeover bids. This request was prompted by transactions where bids for shares with fewer voting rights were lower than for shares with more voting rights or where bids were made only in respect of the shares with higher voting rights. A petition was submitted to the US Securities and Exchange Commission asking for share- holders in US listed companies to be able to vote on appointments of auditors, while the International Accounting Standards Board was urged to assign a greater role to represen- tatives of institutional investors when adopting new, internationally applicable accounting standards. 16 There may sometimes be practical obstacles that make it impossible to vote at meetings of certain companies or in certain countries. ABP works with other institutional investors in an international setting to try to remove these obstacles
    • 78 Annual Report 2008 ABP ABP expressed its concerns to the Board of the Brazilian stock exchange about short- comings in the country’s national regulations on takeovers. The European Commission was asked to investigate a transaction on the Greek stock exchange that, in ABP’s view, violated the European takeover rules. In the Netherlands, ABP is active within Eumedion, an alliance of institutional investors seeking to promote good corporate governance, primarily in the Netherlands and Europe. Further information on all the activities involved in ethical investment can be found in the Responsible Investment Report, which is available on the website. Portfolio management expenses Compared with other pension funds, ABP has allocated a relatively large proportion of its portfolio to alternative investments. These investments increase the expected long-term real returns and improve the pension fund’s long-term risk profile. The higher returns and reduced risks are, however, offset by higher costs. This rising trend in costs is in evidence among all large pension funds around the world. Each year, the investment performance – in terms of risk, return and costs – is measured against the international global benchmark compiled by CEM Benchmarking Inc. (see table 9.6). Table 9.6. Portfolio management expenses17 2008 2007 Fund assets (€ billion) 172.9 216.5 Investment return (%) -20.2 3.8 ABP investment expenses, CEM definition (basis points) 28.9 27.7 CEM benchmark median (basis points) Not available 25.4 Portfolio management expenses are shown in accordance with the new CEM definition, which includes the fund-of-funds expenses relating to private equity investments. The figure shown in basis points for ABP’s 2007 expenses in compliance with the CEM definition has been adjusted to reflect this change. Total portfolio management expenses are fractionally higher than the median because of ABP’s relatively higher level of investments in private equity (fund-of-funds). The increase in basis points in 2008 is almost wholly attributable to the decrease in capital invested. The CEM median for 2008 has not yet been published. Portfolio management expenses can be divided into three categories. The first category, organisational expenses, which totalled € 208 million in 2008 (2007: € 152 million, but this excludes fund-of-funds expenses), is largely determined by the number of employees in the administrative organisation. The numbers of these employees rose from 440 to 490 FTEs in 2008, partly owing to increased exposure to illiquid investments, investments in equities and the accompanying administrative and ICT tasks. Organisational expenses also rose because the fact that ABP is no longer a self-administering fund means that certain expenses that were previously included in investment expenses are now shown as orga- nisational expenses. The second expense category of € 127 million (2007: € 126 million), which includes custody and other fees for external managers, remained almost unchanged 17 The CEM benchmark for 2008 is not yet available. Similarly, it is not possible to provide a five-year review, as provided for pensions, because a consistent definition of the CEM benchmark for asset managers was not applied until 2006.
    • 79 Annual Report 2008 ABP from last year, owing to an increase in the number of external managers, primarily in niche markets, and a decrease in the amount of invested capital. The third category of portfolio management expenses relates to the investment results achieved. These expenses are based on performance exceeding a specified level and fell from € 205 million in 2007 to € 185 million in 2008.
    • Land reclamation was a central theme running through the life of Cornelis Lely, the engineer who conceived and designed the Afsluitdijk (closure dike). The reclamation of the Zuiderzee, an inlet of the North Sea, had been discussed for centuries, but Lely was the first to devise technically feasible solutions to such problems as draining the river IJssel. Reclaiming the Zui- derzee was seen as an impossible dream, even after Lely presented his ideas. Lely was able to implement his plan because, as well as an engi- neer, he was a capable politician, serving as Minister of Transport, Public Works and Water Management in three administrations. His plans were finally approved in 1916, when flooding along the shore of the Zuiderzee brought home to people how naive it was to ignore the dangers posed by the sea. The coast of the Zuiderzee was many hundreds of kilometres long, making it very difficult to provide effective defences. Lely’s idea, simple but ingenious, was to shorten the coastline. He died in 1929 at the age of 74 and did not witness the completion of the Afsluitdijk, but his cor n elis lely memory lives on. The town of Lelystad was named after him and several statues have been erected in his honour, including one on the Originator in 1891 of the plan to Afsluitdijk itself. enclose the Zuiderzee. Lely’s idea was applied again later in the twen- tieth century, in the Delta project to shorten the Zeeland coastline in the south of the Nether- lands. With climate change, water management can only grow in importance in the longer term.
    • One hundred years to create a safe, clean delta The Dutch water boards are working to make sure the country remains inhabitable over the next hundred years in highly changeable conditions. The Delta Commission, chaired by the former agriculture minister Cees Veerman, set out the plans in this respect in its ‘Working with Water’ report. Joseph Vos, chairman of the Brabantse Delta water board, discusses the report below. There are various possible scenarios that the Netherlands has to take serious account of over the coming decades as climate change is expected to result in a significant rise in sea levels, as well as periods of heavy rainfall interspersed with long periods of drought. “The water boards are facing quite some challenges ahead, but we’ve got to prepare for them properly,” explains Joseph Vos. “The Delta Commission has looked at a period of one hundred years, but in essence we have to start dealing with its recommendations now.” Keeping the Netherlands inhabitable The measures proposed by the Delta Commission cover the main waterways (in other words, the North Sea, Wadden Sea, IJssel- meer lake and the major rivers) and also the regional waterways (encompassing all the other waterways). As Joseph Vos says, “What the water boards have to do in their own areas is make sure the waterways are strong enough to cope with the expected changes. We are trying to structure the system so that it can cope both with very wet periods and very dry periods. If there is heavy rain, there needs to be enough capacity in the system to channel off the water, but also to store it so it can be used in the event of a drought.” Restoring the health of our water As well as being responsible for water supply and safety, the water boards are also responsible for maintaining the quality of the water. The European Union has set standards for water quality and management, and these have to be met by 2027. As well as a whole range of substances that are not allowed to be present in water, these standards also and primarily cover the ecology and biodiversity in and around the water. According to Joseph Vos, “That’s also something we’ve got to start working on now. The Netherlands has certainly got very high standards as far as environmental policy is concerned, but at the same time we use our land highly intensively and have a lot of agriculture, heavy volumes of traffic, lots of industry and a high population density.” He also mentions the interaction between water safety and quality. “The Delta works have been a great success from a safety perspective, but ecologically they are a disaster. That means we need to identify ways of increasing safety, but at the same time also restoring the health of our water.”
    • Financial statements 2008
    • 84 Annual Report 2008 ABP (in € million) 31-12-2008 31-12-2007 Consolidated financial statements Consolidated balance sheet Investments (1) - real estate 17,968 22,245 - equities 54,779 90,573 - fixed-income investments 93,050 99,295 - derivatives 25,109 6,633 - other investments 8,761 6,718 199,667 225,464 Other assets and liabilities relating to investments (2) - securities 29,982 31,424 - receivables, prepayments and accrued income 10,881 4,486 - cash and short-term lending 23,283 20,303 - long-term liabilities - 95 -2 - payables, accruals and deferred income - 79,265 - 54,165 - short-term borrowing - 10,231 - 9,584 - minority interests - 15 - 18 - 25,460 - 7,556 Other assets and liabilities (3) - participating interests 325 274 - intangible assets 47 - - tangible assets 138 106 - receivables, prepayments and accrued income 1,307 952 - cash 361 419 - provisions - 52 - 30 - long-term liabilities - 61 - - payables, accruals and deferred income - 612 - 816 - minority interests - 37 - 1,416 905 Fund assets 175,623 218,813 Provision for pension liabilities (4) - retirement and surviving dependants’ pensions 189,400 150,844 - disability pensions 1,993 2,188 - flexible and early retirement pensions 1,402 1,512 - ABP ExtraPensioen 133 131 192,928 154,675 Provision for insurance liabilities (5) - proprietary risk 2,532 2,102 - policyholders’ risk 213 198 2,745 2,300 General reserve (6) - 20,050 61,838
    • 85 Annual Report 2008 ABP (in € million) 2008 2007 Consolidated statement of income and expenses Income Net contributions (7) 7,217 6,638 Investment results (8) - 44,114 7,456 - 36,897 14,094 Expenses Benefit payments (9) - 6,911 - 6,507 Movements in provisions for liabilities - pension accruals (10) - 4,495 - 4,755 - indexation (11) - - 6,670 - added interest (12) - 7,325 - 6,676 - utilised for benefit payments and administrative expenses (13) 6,921 6,377 - change in market interest rate (14) - 33,331 14,026 - change in actuarial assumptions (15) - 71 - 497 - change in respect of value transfers (16) - 229 - 382 - other movements (17) 42 285 Net value transfers (18) 260 320 Administrative expenses (net) (19) - 164 - 224 Other income and expenses (20) 312 - 27 - 44,991 - 4,730 Net income and expenses - 81,888 9,364 Appropriation of the net income and expenses: Charged / added to the general reserve - 81,888 9,364
    • 86 Annual Report 2008 ABP (in € million) 2008 2007 Consolidated statement of cash flows Opening balance of cash excluding short-term lending and borrowing 6,345 3,900 Cash flows from pension and insurance activities: - direct investment income received (including derivatives) 1,211 16,566 - contributions received 7,275 6,693 - value transfer payments received 554 468 - benefit payments made - 6,911 - 6,507 - value transfer payments made - 132 - 175 - investment expenses paid - 501 - 476 - other expenses paid - 147 - 213 Cash flow from pension and insurance activities 1,349 16,356 Cash flows from investment activities: - repayments and sales of investments 225,258 377,917 - movement in short-term lending and borrowing - 2,027 3,327 - advances and purchases of investments - 233,981 - 395,571 - net movement in working capital 10,897 416 Cash flow from investment activities 147 - 13,911 Closing balance of cash excluding short- term lending and borrowing 7,841 6,345 - of which, pensions-related 7,482 6,200 - of which, insurance-related 331 145 - of which, administrative organisation 28 -
    • 87 Annual Report 2008 ABP Notes - general Sector pension fund Stichting Pensioenfonds ABP (ABP) looks after the pension arrangements for employees in the public sector and in education. Pursuant to its Articles, the object of the fund, as a sector pension fund for the public sector, education and related sectors and the airport sector, is to insure the pensions of employees, former employees and their surviving dependants.’ Under the ABP Privatisation Act (WPA), the following entities are compulsorily affiliated: – bodies governed by public law; – educational bodies governed by private law; – bodies governed by private law duly designated by the Interior Minister and whose conditions of employment for their employees correspond to the conditions of employment of staff working in one of the sectors affiliated to ABP. ABP’s Articles permit voluntary affiliation on the part of an institution if it has a financial relationship with a compulsorily affiliated institution and has the same object or if it was originally compulsorily affiliated or if it has employees in its service who were originally compulsorily members of ABP. Ambition It is ABP’s ambition that pensions should be fully indexed on an ongoing basis. This includes eliminating the indexation shortfall where the full amount of the indexed increase was not awarded in the past. Ongoing full indexation means that the pensions already in payment or the accrued pension rights of existing and former members are in principle increased each year with effect from 1 January in line with the general average increase in pay levels in the government and education sectors over the preceding year. Indexation is, however, conditional, i.e. the full amount of the increase will be awarded unless the fund’s financial position provides a compelling argument against such adjustment, the decision being entirely at the discretion of the Board of Governors. The Board of Governors has set specific rules determining whether, and if so by how much, pensions should be increased in line with general pay rises. Contributions policy The above ambition is reflected in the contributions policy in that the setting of the contribution rates takes full account of both the unconditional and conditional (pay-related) liabilities. As required by the provisions of Section 128 of the Pensions Act and Section 4 of the Financial Assessment Framework Decree, the contribution rate is determined on the basis of a prudent estimate of the real return on the fund’s assets. In the event of a funding deficit, there is a further constraint that, apart from efforts to mitigate contribution rate fluctuations, the actual level of contributions should be at least equal to the cost-covering contribution rate. ABP will not grant any contribution discounts before any indexation shortfalls have been fully eliminated. Investment policy The investment policy is geared to generating an adequate long-term return with the aim of being able to pay the conditionally promised pensions, while keeping contributions at an affordable level and without incurring unacceptable investment and other risks. The investment policy is formulated in the context of the other elements of the fund’s funding policy. Achieving the indexation ambition (even without guarantee) means achieving a return in excess of that which would be produced by a low-risk investment portfolio made up entirely of long-term, indexed government bonds. A more risky investment policy therefore has to be deliberately pursued.
    • 88 Annual Report 2008 ABP Indexation policy Increases will be awarded unless the fund’s financial position provides a compelling argument against such adjustment. It is entirely at the discretion of the Board of Governors to decide whether, and if so to what extent, annual increases should be allowed. This policy has been translated into an indexation schedule with lower and upper limits for the nominal funding ratio (ranging from 100 per cent to 135 per cent). A funding ratio of 135 per cent and above basically means full indexation. If the funding ratio is less than 135 per cent, however, the rate of increase is progressively reduced from the full amount to nil at the minimum required funding ratio of 104.4 per cent. Given ample funding, there is scope, under certain conditions, to award additional increases to make up for less than full indexation in the past. This does not, however, include making up the amount of benefits already paid with a reduced increase. The funding ratio is obtained by dividing the total funds available to the pension fund by the provi- sion for pension liabilities. The general reserve is the difference between the pension capital and the provision for pension liabilities. It provides a reserve, or solvency margin, and it is also available to fund the conditional indexation increases. The higher the general reserve, the greater the annual increase can be, up to and including full indexation and even making up for indexation shortfalls in the past. If the level of the required capital is inadequate, the annual increase in pensions will be less than the full, indexed amount. In such a situation, the principle is that the reduced increase is applied equally to the accrued pension rights of former contributors and active members as well as pensions already in payment. The same even applies to the accrued rights of military personnel under their final-pay scheme. Pension schemes The pension schemes provided by ABP comprise retirement benefit (OP), surviving dependants’ benefit (NP), incapacity benefit (AAOP, IP and HPT), sector-specific schemes and individual top-up plans. ABP manages all the risks associated with the assumed obligations in house. None of the risks is transferred or reinsured. ABP’s pension schemes have the following features. Participation – While in the employment of an affiliated employer. – For persons in receipt of retaining pay or unemployment pay, partial continuation of participating period (50 per cent and 37.5 per cent, respectively). – For persons in receipt of incapacity benefit, partial continuation of the participating period for retirement and surviving dependants’ pensions (50 per cent in the case of total incapacity for work). – Conversion factors for years of participation in the retirement/surviving dependants’ pension scheme prior to 1 January 1996, so as to enable the number of years in the scheme to be calculated on the basis of the current franchise system for everyone. Pension base – Pensionable income: in principle, all income components paid in cash received by an employee from his or her employer in respect of employment. – Certain income components are not pensionable by law. – Franchise: € 10,100 (€ 10,350 with effect from 1 January 2009); franchise is systematically adjustable to the level of the state old-age pension for married couples. For participants coming under the flexible and early retirement benefit scheme, a different franchise of € 16,400 (€ 16,700 with effect from 1 January 2009). – Pension base is pensionable income minus franchise. – With effect from 1 January 2004, the ABP pension scheme has been an average pay scheme; the amount of pension rights built up prior to that date has been fixed on the basis of the pensionable income as at January 2004.
    • 89 Annual Report 2008 ABP Retirement pension (OP) The ABP standard and flexible retirement pension scheme goes under the name of ABP Keuze- Pensioen, which describes a scheme under which there is the option of tailoring the pension to personal requirements. For instance, this scheme allows for a flexible retirement date (between the ages of 60 and 70), it has the option of combining part-time working with a part-pension, it permits the amount of the benefit paid to be varied within certain limits and it allows one type of pension to be converted into another (e.g. retirement pension into extra surviving dependents’ benefit and vice versa). The ABP KeuzePensioen applies to members born after 1949 and members born before 1950 not covered by the FPU transitional arrangements. The accrual of pension rights in any one year of membership amounts to 2.05 per cent of the pension base for that year. Those participants who do not fall within the FPU transitional scheme and were government employees on 31 December 2005 and on 1 January 2006 can take advan- tage of tax allowances not fully utilised by ABP for OP and NP pensions when they were members of the pension scheme prior to 1 January 2006. The rights accrued by these means are, however, conditional in nature, i.e. they only become vested rights with effect from 1 January 2023 and only then for those who are still participants. In the case of retirement prior to this date, the contingent rights as at the date of retirement become vested. The promise to build up extra rights was made as of 31 December 2007 and the accrual of those rights commenced on 1 January 2008, within the framework laid down by Section 4 of the Social Accord 2004 (Pension Aspects) Implemen- tation Decree. Participants covered by the FPU transitional scheme build up pension rights at a different rate of 1.75 per cent. Flexible pension and early retirement benefit (FP) The FPU scheme was discontinued with effect from 1 January 2006 for participants born on or after 1 January 1950. Accrual of FPU pension rights ceased for this group with effect from 1 January 2006. As already mentioned, the scheme has been replaced by one providing enhanced retirement benefit. Participants born before 1 January 1950 and satisfying certain conditions retain their flexible pension rights (as amended with effect from 1 January 2006). Surviving dependants’ pensions (NP) The surviving dependants’ pension comprises the partner pension and the orphans’ pension. The partner pension (PP) is divided into a partner pension payable on death before the age of 65 (PP65-) and a partner pension payable on death after the age of 65 (PP65+). The PP65- pension currently amounts to 50 per cent of the OP retirement benefit, with pension rights continuing to accrue up to the age of 65. The PP65+ pension amounts to 5/14ths of the OP benefit. For the period of participation prior to 1 July 1999, the partner pension (PP65- and PP65+) continued to accrue; for the period from that date onwards, only the provision for the PP65+ pension continues to accrue, the PP65- pension liability being insured. The orphans’ pension (WZP) currently amounts to 1/10th of the OP retirement benefit for the loss of one parent and 2/10ths for the loss of both parents. The right to WZP benefit lapses on attaining the age of 21 in both cases. Incapacity/disability pension Under the Work and Income (Ability to Work) Act (WIA), with effect from 1 January 2007, anyone qualifying for state benefit will automatically be entitled to receive an ABP incapacity pension (AAOP) designed to supplement the various state benefits: basic WIA benefit, IVA benefit (for the totally disabled), wage-related benefit (LGU), wage-supplementing benefit (LAU) and follow-on benefit (VVU).
    • 90 Annual Report 2008 ABP Disability pension For participants able to claim disability benefit under the Disablement Insurance Act (WAO), the ABP disability pension and redeployment benefit scheme (IP/HPT) in operation prior to 1 January 2006 continues to apply. Rights on leaving employment If active participation in the pension fund is terminated other than by the award of a pension or death, OP and NP benefit rights, with the exception of the insured PP65- liability, become vested in proportion to the period of participation or continue to accrue on a non-contributory basis (the same applying to FPU and ABP ExtraPensioen, if applicable). The final value of ABP ExtraPensioen is determined at the time of leaving the scheme and translated into non-contributory rights to OP/ PP benefit (PP65+). Participants’ contributions – The participant’s contribution for the OP/NP scheme amounts to 30 per cent of the total contribution and, for the ANW benefit compensation scheme, 75 per cent of the total contribution. – The participant’s contribution for the AAOP scheme amounts to 25 per cent of the total contribution. Defence sector scheme The defence sector has a final-pay scheme for professional military personnel, with a franchise of € 16,600 (€ 16,950 with effect from 1 January 2009) and an accrual rate of 1.75 per cent. Military personnel do not participate in the AAOP and IP/HPT schemes and are not covered by FPU transitional arrangements. Individual supplementary benefits The pension rules provide for various voluntary arrangements for building up extra retirement benefit entitlement or for continuing schemes on a voluntary basis, for example, after leaving employment. Participants availing themselves of these options pay an individually calculated contribution or an average contribution, depending on the specific terms of the scheme.
    • 91 Annual Report 2008 ABP Accounting policies General These financial statements have been prepared on the basis of financial reporting policies generally accepted in the Netherlands and the statutory provisions concerning annual accounts contained in Part 9, Book 2, of the Netherlands Civil Code and the Guidelines for Annual Reporting in the Netherlands. In the consolidated balance sheet, the pension and insurance liabilities and the matching invest- ments are mainly of a long-term nature. The other items are included in the other assets and liabilities relating to investments and in the other assets and liabilities. In the consolidated balance sheet, the general reserve is equal to the difference between the total fund assets and the total of the provisions for pension and insurance liabilities. All income and expenses are recognised in the period to which they relate. ABP accounts for all movements in the general reserve via the statement of income and expenses where permitted. This means that the Items in the statement of income and expenses are largely a function of the accounting policies in respect of the investments and the provisions for pension liabilities and for insurance liabilities applied in the preparation of the balance sheet. The company balance sheet and company statement of income and expenses are included separately. Change in accounting policies An amended version of Guideline 610 Pension Funds applicable with effect from the beginning of the reporting period has been published by the Council for Annual Reporting in the Netherlands (CAR). The change essentially concerns the recognition of negative investment and derivative positions as liabilities relating to investments. This reclassification does not affect the result, the total fund assets or the total liabilities. The comparative figures have been restated. Basis of valuation and determination of results Basis of consolidation In the consolidated financial statements, investments in the equity of entities in which ABP has the power to govern the financial and operating policies are included by applying the integral method of consolidation. The interests in these entities commonly represent elements of the investments. Consolidating them on the above basis looks beyond the legal form of the interest and provides a direct view of the overall financial position of ABP. Consolidation is performed using uniform accounting policies. Minority interests in entities in which ABP has investments are included separately under the other assets and liabilities relating to investments and the results relating to these minority interests are deducted from the investment results. Other minority interests are accounted for under the other assets and liabilities and under other income and expenses. The consolidation is based on figures deemed to be appropriate for consolidation purposes. A list of consolidated entities is included under the heading of other information. Interests in joint ventures are not consolidated. Estimates Preparing the financial statements involves using estimates and assumptions which can affect the reported assets, liabilities, income and expenses. This is particularly the case with respect to
    • 92 Annual Report 2008 ABP the calculation of the provisions for pension and insurance liabilities and the measurement of the illiquid investments. It may subsequently be found that the reported amounts differ from the actual amounts. Recognition Unless otherwise stated, assets and liabilities are carried at current value. An asset is recognised in the balance sheet when it is probable that the future economic benefits of the asset will flow to the pension fund and the amount of the asset can be measured reliably. A liability is recognised in the balance sheet when it is probable that an outflow of resources embodying economic benefits will result from the settlement of a present obligation and the amount at which the settlement will take place can be measured reliably. Income is recognised in the statement of income and expenses when an increase in future econo- mic benefits related to an increase in an asset or a decrease in a liability has arisen that can be measured reliably. Expenses are recognised in the statement of income and expenses when a decrease in future economic benefits related to a decrease in an asset or an increase in a liability has arisen that can be measured reliably. Foreign currency translation The year-end balances of assets and liabilities denominated in foreign currencies are translated into euros at the rates prevailing on the balance sheet date. The rates used for translation purposes are the 4 p.m. London World Market fixing rates on the last day of trading for the year as published by Reuters. The resultant translation differences are included in investment results. Income and expenses in foreign currencies are translated into euros at the rates prevailing on the transaction date. Differences between the transaction rate and the settlement rate are included in investment results. The policy with respect to investments outside the eurozone is the same. Basis of valuation of assets and liabilities Investments Real estate The real estate investments concern investments in real estate funds and direct investments in real estate. Investments in real estate funds are carried at current value, where possible derived from quoted market prices. Direct investments in real estate are carried at current value, measured on the basis of value in use as determined by external and internal valuers on the basis of appraisal by rotation of part of the portfolio as let property. Equities Investments in shares, convertible bonds and private equity are carried at current value, based on quoted market prices where available. Where quoted prices are not available, the current value is measured using valuation methods generally accepted in the financial sector. In the case of shares of business start-ups, the investment is measured at not less than the amount of the contributed share capital for the period during which start-up losses are expected. Fixed-income investments The fixed-income investments concern bonds, index-linked bonds, mortgage loans and private placements, including climbing loans.
    • 93 Annual Report 2008 ABP Bonds, including index-linked bonds, are carried at current value measured, where available, on the basis of quoted market prices, and adjusted for accrued interest. If no quoted price is available, the current value is calculated on the basis of the contracted cash flows and the market interest rates appropriate to the remaining terms to maturity. If warranted by ABP’s estimates of the risk, spreads are also taken into account. Mortgage loans are carried at current value, allowing a fixed spread for the risk of early repayment, credit risk and liquidity risk. Savings-based mortgages are shown net of the accumulated savings. Investments in private placements (including climbing loans and real estate finance leases) are carried at current value adjusted on the basis of market information and marked down for the liquidity risk as well as being adjusted for accrued interest. The current value of private placements is arrived at by calculating the net present value of the contracted cash flows from these loans using market interest rates appropriate to the remaining terms to maturity. Climbing loans are shown inclusive of the capi- talised interest. Real estate finance lease loans are measured, applying fixed spreads for liquidity risk and credit risk. Derivatives Derivatives are financial instruments used in controlling balance sheet and investment risks and achieving the strategic investment mix. As far as the investment risks are concerned, they are used mainly to manage and make adjustments to the strategic asset mix and the tactical and regional asset allocation/reallocation, for duration management and to hedge exchange risks. The derivatives position is presented separately under the heading of investments. Derivatives with a negative current value are presented as payables under the heading of other assets and liabilities relating to investments. Derivatives positions are carried at current value. For certain instruments, such as over-the-counter derivatives, use is made of valuation models based on certain assumptions, e.g. with respect to credit risk, correlations and interest rate term structures. Other valuation models and assumptions might produce a different estimate. Other investments Other investments are investments which cannot be allocated to any of the other investment categories. They concern commodities, absolute-return strategies and so on. Where possible, commodities are measured at quoted market prices. Absolute return strategies and the other items are carried at current value. Other assets and liabilities relating to investments and other assets and liabilities Receivables, payables, prepayments and accrued income, accruals and deferred income, cash and long-term liabilities relating to investments, except for securities (reinvested cash collateral connected with securities lending) are included at fair value. After initial recognition, the receivables and payables are carried at amortised cost. For receivables and payables, the carrying amount corresponds to the face value, less any provisions deemed necessary for bad debts in the case of receivables. Securities representing reinvested cash collateral are carried at current value calculated in the same way as the investment category to which the investment belongs. In the absence of a quoted market price, use is made of valuation models based on certain assumptions, e.g. with respect to credit risk, the risk of early repayment and interest rate term structures. Other valuation models and assumptions might produce a different estimate. Cash is carried at face value.
    • 94 Annual Report 2008 ABP Participating interests Participating interests are investments in the share capital of entities in which ABP has the power to participate in the financial and operating policy decisions. They are carried at net asset value. Investments in entities in which ABP does not have the power to participate in the financial and operating policy decisions are not consolidated. Other equity investments are presented in the investment category to which they relate since they do not qualify as participating interests unless they are held with a view to a lasting relationship serving the company’s own activities. Intangible assets The intangible assets are carried at cost less straight-line amortisation. The amortisation period is based on the expected useful life of the assets concerned, taking into account any impairment losses. In the event of acquisition of a company, all identifiable assets and liabilities of the acquired company are recognised in the balance sheet at their fair value on the date of acquisition. Goodwill arising on acquisition is measured on initial recognition as the difference between the purchase price and the fair value of the identifiable assets and liabilities. Tangible assets Buildings for use by the company and tangible assets such as computers and office equipment are carried at the lower of cost and value in use less straight-line depreciation calculated over the estimated useful lives of the assets concerned. Provisions This item includes the provisions that are charged against fund assets. Deferred tax provision The provision for deferred tax includes the deferred tax liabilities resulting from temporary differen- ces between the reported amounts of assets and liabilities and their tax bases. Calculation takes account of tax rates applicable in future years that have already been enacted. The carrying amount is measured at face value. Deferred tax of a short-term nature is included in payables. Other provisions The other provisions are carried at the net present value of the expected future expenses, taking account of the relevant actuarial assumptions. The discount rate used is based on the year-end interest rate on investment-grade Dutch corporate bonds with a maturity matching the remaining term of the provisions. Where the expected term of the provisions is longer than 15 years, the discount rate is based on long-term government bonds. Provision for pension liabilities The provision for pension liabilities has a long-term nature and is made up of the defined benefit provisions based on average pay (civilians) or final pay (career military personnel) and length of service for retirement and surviving dependants’ pensions, flexible and early retirement pensions (including the special police AFUP scheme) and incapacity pensions (AAOP, IP and HPT) and the defined contribution provision for ABP ExtraPensioen. The actuarial assumptions used are explained in greater detail below. The defined benefit provisions for pension liabilities are equal to the net present value of the expec- ted future benefits payable plus a surcharge to cover disbursement costs. The provision is computed according to actuarial assumptions on the basis of observations of ABP’s members (including mor- tality rates and partner frequencies), the mortality rates used also taking account of expected future trends. The calculations relate exclusively to the time-related benefits accrued up to the end of the year and are based on general wage and salary increases up to and including 1 January of the next year if and to the extent that the Board of Governors has decided to allow an increase.
    • 95 Annual Report 2008 ABP With effect from year-end 2007, the provision for pension liabilities has been calculated directly on the basis of the interest rate term structure published by DNB. The mortality rates used are taken from the 2003 Review of Actuarial Assumptions (performed in 2005), relating to the observation years 2001—2003, and also take account of the mortality rate projections made by Statistics Netherlands (CBS) for the period 2004–2050. The assumptions used for the actuarial computations are periodically updated and assessed in the interim. In 2009, there will be a review of the actuarial assumptions (made every three years), based on observations for the years up to and including 2007. This review will also update the mortality rate projections. Provision for retirement, surviving dependants’ and flexible and early retirement pensions The retirement pension, the surviving dependants’ pension in the case of death of the participant before the age of 65 (period of service prior to 1 July 1999) and in the case of death after the age of 65 and the flexible and early retirement pension are all fully funded plans. The surviving dependants’ pension in the case of death of the participant before the age of 65 for the period of service since 1 July 1999 is an insured plan. For the surviving dependants’ pension, the ‘standard partner’ method is used, which assumes that, at the time of death of a male or female participant, a partner will be three years younger or two years older, respectively. Provision for incapacity pensions (IP/HPT/AAOP schemes) The IP/HPT scheme supplements the benefits payable under the old Disablement Insurance Act (WAO) and, with effect from 2006, under the new Work and Income (Ability to Work) Act (WIA). With effect from 1 July 2007, the disability pensions (IP) cease to be increased each year in line with state disablement benefit (WAO) and are instead increased independently according to the ABP percentage. With effect from 1 January 2007, the IP/HPT scheme has been replaced by the new AAOP scheme, providing an incapacity pension to supplement the state benefit payable under the WIA. Both plans are entirely insurance-based, i.e. the provision relates only to pensions already in payment. CAR Guideline 610 includes a recommendation to allow for the future claims from those partici- pants who are known to be in ill health as at balance sheet date and are expected to be declared unfit for work when calculating the provision for incapacity pensions. This recommendation has not been followed for the simple reason that participants have no entitlement to an incapacity pension unless they have been declared unfit for work. If participants who are in ill health are declared unfit for work in any particular year, their entitlement to an incapacity pension is covered by means of the interest-covering contribution for that year. Provision for ABP ExtraPensioen The provision for the ABP ExtraPensioen plan, which is a defined contribution plan, is equal to the current value of the invested funds from contributions plus a reserve in respect of the guarantee given by ABP regarding the nominal value of the contributions. Provision for insurance liabilities The provision for insurance liabilities has a long-term nature and is made up of the provision for life insurance liabilities and the provision for non-life insurance liabilities. The mortality rates used for the life insurance liabilities are the same as those given by the mortality tables published in 2006 by the Dutch Association of Insurers. In the case of policies under which benefits are indexed each year based on a decision (essentially depending on actual investment results), the actuarial interest rate is taken from the yield curve published by DNB. The provision includes a mark-up for future administrative expenses.
    • 96 Annual Report 2008 ABP The main non-life insurance contracts concern disablement/incapacity insurance. The provisions for these non-life insurance schemes are based on the estimated amount of the benefits ultimately payable in respect of all claims arising prior to the balance sheet date, regardless of whether they had already been reported at that date, along with the associated existing and future administrative expenses. General reserve The general reserve is equal to the total of the fund assets less the total of the liabilities. Apart from providing a source of funding to cover unexpected deficits, the general reserve can also be drawn on to fund possible future indexation rounds. Pension funds are legally required to maintain a general reserve of approximately 5 per cent of the provision for pension liabilities as a minimum. This is to be seen as a mandatory reserve. If the general reserve falls below that level, the shortfall has to be made up within the temporarily increased period of five years. This is the situation in which ABP finds itself.
    • 97 Annual Report 2008 ABP Basis of determination of results Statement of income and expenses Items in the statement of income and expenses are largely a function of the accounting policies in respect of the investments and the provision for pension liabilities applied in the preparation of the balance sheet. Both realised and unrealised results are accounted for directly in the fund result, on the principle of ‘fair value through profit or loss’. Contributions Contributions are attributed to the period to which they relate. An estimate is made on the basis of extrapolation if the necessary information has not been received from employers. The amount allowed to cover the costs of collection is accounted for in the benefit payments and administrative expenses. Investment results Investment results are attributed to the period to which they relate. Dividends are recognised when they are made payable. Capital gains and losses are accounted for in the period in which they occur. Other income Other income is attributed to the period to which it relates. Benefit payments Benefit payments are attributed to the period to which they relate. Movements in provisions for liabilities Pension accruals Pension accruals are attributed to the period in which the accrual of pension rights takes place. An exception to this is the assumed continuation of active service for the purposes of pension accrual in the case of incapacity and death. This future accrual of pension rights is recognised immediately in the year in which the participant becomes unable to work or dies. Indexation The amount of the annual indexation increase is not recognised in the statement of income and expenses unless the Board of Governors has taken its decision on or before the balance sheet date. Added interest The interest cost added is calculated on the basis of the nominal interest rate for a period of one year included in the interest rate term structure published by DNB for interbank swaps at the beginning of each year. The interest is calculated on the opening balance and the movements during the year. Benefit payments and administrative expenses The amount released from the provisions for pension and insurance liabilities is credited to the statement of income and expenses in the period for which provision for the expenses concerned was made in the calculation of those provisions.
    • 98 Annual Report 2008 ABP Change in market interest rate The effect which the adjustment of the actuarial interest rate in line with market rates has on the provisions for pension and insurance liabilities is recognised in the statement of income and expenses at the end of the reporting period. Change in actuarial assumptions The effect which the adjustment of the actuarial assumptions has on the provisions for pension and insurance liabilities is recognised in the statement of income and expenses at the end of the reporting period. Change in respect of value transfers Changes in respect of transfers of pension rights are attributed to the period to which they relate. Other movements Other movements in provisions for liabilities are attributed to the period to which they relate. Net value transfers The net amount of value transfers in and out of the fund is recognised at face value and attributed to the period in which the transfers are made. Administrative expenses (net) Administrative expenses are attributed to the period to which they relate. The tax expense – where applicable – is calculated on the result before tax, taking account of tax- exempt items and entirely or partially deductible expenses and using the tax rate appropriate to the financial year concerned. Other expenses Other expenses are attributed to the period to which they relate. Basis of the cash flow statement The statement of cash flows has been prepared using the direct method. The notes to the statement of cash flows explain the variances between movements in the items in the consolidated statement of income and expenses and the items in the consolidated statement of cash flows. Receipts and expenditures in foreign currencies are translated into euros at transaction date exchange rates. The differences arising because of differences between the transaction rate of exchange and the settlement rate of exchange are included in the direct investments income received. The policy with respect to investments outside the eurozone is the same.
    • 99 Annual Report 2008 ABP (in € million) 2008 2007 Notes to the consolidated financial statements Risk management Section 7 of the report by the Board of Governors, entitled Risk Management, considers the risks which ABP faces and the policy pursued in order to minimise those risks. The following section presents more quantified information together with sensitivity analyses but does not consider specific insurance-related risks. Funding deficit As at year-end 2008, there is a funding deficit; the general reserve (which is in fact negative) is less than the minimum required capital, the amount of which is set according to the provisions of Section 11 of the Financial Assessment Framework Decree, at 4.4 per cent of the liabilities (€ 8.4 billion) as at year-end 2008. This means there is a funding deficit as at year-end 2008 of € 28.4 billion. Table 1: Funding deficit (including derivatives positions) Effect on capital Minimum required capital 8,411 6,806 As percentage of technical provisions 4.4% 4.4% Actual capital - 20,050 61,838 Less: Minimum required capital 8,411 6,806 Funding deficit / surplus - 28,461 55,032 As percentage of technical provisions - 14.8% 35.6% Reserve deficit As at year-end 2008 there is also a reserve deficit; the negative general reserve is less than the required capital. The amount of the required capital is set on the basis of the standard model laid down in the Financial Assessment Framework Decree and the Pensions Act Regulations, defining the various risk elements borne by ABP, and, as at year-end 2008, amounts to 23.6 per cent of the liabilities (€ 45.5 billion). As at year-end 2008, the reserve deficit therefore amounts to € 65.5 billion. In measuring the liabilities, use is made of the long-term swap curve figures published by DNB. This standard model involves measuring the adverse effect on capital, in euros, of a number of risk factors. The calculation of the required capital is based on the assumption that not all the risks will manifest themselves simultaneously (diversification effect). The results of the model depend on market conditions and the existing investment risk profile, and can therefore fluctuate over time. The capital is deemed to be adequate if the general reserve is greater than the required capital. Table 2 gives the results of the standard model for ABP, as measured at year-end 2007 and 2008.
    • 100 Annual Report 2008 ABP (in € million) 2008 2007 Table 2: Reserve deficit Effect on capital S1. Interest rate risk 20,560 17,318 S2. Equities and alternatives risk 29,593 26,773 S3. Currency risk 7,928 8,713 S4. Commodity risk 2,122 1,817 S5. Credit risk 7,193 2,177 S6. Underwriting risk 6,444 4,888 Subtotal of all risks 73,840 61,686 Less: diversification effect 28,370 21,834 Required capital 45,470 39,852 As percentage of technical provisions 23.6% 25.8% Actual capital - 20,050 61,838 Less: required capital 45,470 39,852 Reserve deficit / surplus - 65,520 21,986 As percentage of technical provisions - 34.0% 14.2% The required capital is determined on the basis of the equilibrium position, i.e. where the general reserve is just sufficient to accommodate the combined effect of the above scenarios. As at year- end 2008, the amount thus calculated is greater than that arrived at if the effect of the risk factors is determined in relation to the actual capital because the margin between existing and required capital also has to be able to accommodate interest rate shocks and exchange rate movements. Principle of diversification Any investment involves an element of risk. It is simply not possible to engage in investment activities without incurring risk definitely not in the short term. The assumption is that ABP will gain in the long run by deliberately accepting those risks. To succeed, however, proper risk management is an essential part of ABP’s activities. The most important way of limiting the risks is to diversify or spread the investments across a whole range of investment instruments, business sectors and markets. Diversifying the investments in this way is not sufficient on its own, however. The asset mix also has to match the risk profile of the pension obligations. Strict limits apply to ABP’s investments. The restrictions are monitored on a daily basis. There is a limit on the active risk - the risk due to management decisions - both for the ABP portfolio as a whole and for the individual funds. In addition, there are specific limits for the interest rate risk and for credit risks. The interest rate risk is expressed in terms of the duration, or the average weighted maturity. For the credit risks there are exposure limits for assets with a given rating and for individual counterparties. Derivatives are used to increase or reduce the exposure to certain risks or the size of positions, in order to adhere more closely to the investment policy laid down in the 2007-2009 investment plan. Derivatives are also used to bring the investments more into line with future obligations. This involves lengthening the duration of the fixed-income investments.
    • 101 Annual Report 2008 ABP Some of the investments are quoted in US dollars and, to mitigate the risk of dollar appreciation or depreciation and safeguard the cash flows in euros, ABP hedges the currency risk. The pension administrator monitors and calculates the financial and credit risks on a daily basis at overall portfolio level and reports accordingly to the Board of Directors and to the Financial Risk Committee. In view of the turbulence created in the financial markets by the subprime crisis, the pension administrator has also set up a separate committee on which all the asset categories and risk managers are represented. In this ad hoc forum, the developments in the markets are discussed and considered in relation to the positions and processes within ABP. This covers such things as actions to be taken regarding internal and external portfolios which need to be watched carefully and the identification of opportunities. This combination of different disciplines and different perspectives makes for the effective and efficient exchange of information across the whole operation and forms a supplementary basis for investment decisions. Interest rate risk The interest rate risk is a function of the interest rate sensitivity of assets and liabilities and is therefore an important element in the mismatch risk – specifically the difference between the interest rate sensitivity of the assets and that of the liabilities they fund. As the interest rate rises and falls, it affects the assets and the liabilities, and hence the funding ratio. On the assets side, interest rate sensitivity is greatest for the fixed-income investments. The interest rate sensitivity is expressed by the ‘duration’. The duration is the average weighted maturity of all cash flows (interest and repayments of principal) relating to the fixed-income products. If the market interest rate falls by 1 percentage, for example, the value of the portfolio will rise by approximately 1 percentage times the duration of the portfolio and vice versa. For ABP’s fixed-income investments, the duration is approximately five years, whereas the figure for the liabilities is approximately 16 years. In other words, there is a mismatch in terms of duration, or interest rate sensitivity, between the fixed-income investments and the liabilities. By means of long-term interest rate swaps with a duration of over 15 years, the weighted duration of the fixed-income investments has been extended from 8 to 9 years. At the beginning of 2009, the duration was further extended to 10 years, in line with the objective of the 2009 investment plan. This has the effect of reducing the mismatch and hence the risk of a fall in the funding ratio due to falling interest rates. In figures, the exposure of the interest rate swap contract is € 19.1 billion. Having regard to the reduction in the interest rate risk provided by this swap contract, a fall in the nominal market interest rate of one percentage point will lead to a fall in the funding ratio of approximately 10 percentage points. The interest rate effect on other assets (equities and so on) is disregarded for this purpose. Apart from going up and down, interest rates can also vary for different periods, leading to a change in the shape of what is referred to as the yield curve. If interest rates at the long end of the market go up by more than short-term interest rates, the yield curve is said to steepen. The partial duration is a reflection of the interest rate sensitivity of the portfolio over different time horizons (years). The following graph presents the interest rate sensitivity of the fixed-income investments plotted against maturity.
    • 102 Annual Report 2008 ABP Graph 1: ABP portfolio partial durations fixed income investments (including derivatives positions, securities lending and reinvested cash collateral) 10.00 9.00 Partial duration 9 8.00 Cumulative partial duration 7.00 6.00 5.00 4.00 3.00 Partial duration 2.00 1.00 0.00 1 year 2 years 3 years 5 years 10 years 20 years 30 years ABP Overlay (30 years) Leaving aside the strategic extension of the duration resulting from the ABP overlay, the maximum interest rate sensitivity, prior to extension of the duration, lies in the 5-year and 10-year segment. The extension of the duration of the portfolio of fixed-income investments provided by the overlay is reflected in the last bar in the graph. The curve plots the cumulative interest rate sensitivity as at year-end 2008. Equities and alternatives risk To manage the price risks on investments in equities and alternatives (excluding hedge funds), ABP applies a policy of maximum diversification across geographical regions, asset categories and sectors. Information on this is contained in the notes to the balance sheet. Equities and alternative investments (excluding hedge funds) account for around 50 per cent of the total investments, which means that a fall in the price of these investments of 10 percentage roughly translates into a 5 percentage point increase in the funding ratio. Active risk There are various methods for measuring and monitoring risks. An important measure is the tracking error. This plays an important part in portfolio risk management. The tracking error measures the price sensitivity of the portfolio relative to the chosen benchmark, an actively managed portfolio serving as reference. Tracking error limits are applied both to ABP’s strategic assets and to the individual investment funds. The tracking errors of the strategic assets and investment funds are measured using risk systems which provide continuous monitoring.
    • 103 Annual Report 2008 ABP Graph 2: ABP portfolio tracking errors fixed income investments (including derivatives positions, securities lending and reinvested cash collateral) Active risks 2.0% 1.8% 1.6% 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% Tracking error 0.2% 0.0% Dec 07 Mar 08 Jun 08 Sep 08 Dec 08 Liquid real estate investments ABP portfolio Commodities Equities Fixed-income investments Index-linked bonds The graph plots the various tracking errors, i.e. the differences in yield between the ABP portfolio and the benchmarks. The tracking error for the entire ABP portfolio (thick blue curve) remained within limits throughout 2008. The noticeable upturns in the curves for both fixed-income invest- ments and equities are the effect of the credit crisis. The impact of the crisis is apparent in the fourth quarter in particular. Currency risk ABP incurs currency risk because part of the risk-spreading strategy involves investing in foreign currencies. The risk stems from the fact that ABP pensions are paid in euros. The currency risk is limited in that the greater part of the investments outside the eurozone is denominated in US dollars and, in 2008, the related currency risk was almost entirely hedged. A natural hedge is sought when reinvesting cash collateral. Table 3 analyses the effects of spreading the investments across different currencies before and after hedging operations as at year-end 2008. Table 3: Range of currencies as at year-end 2008, excluding reinvested cash collateral (in € million) Before Result of After hedging hedge hedging Euro 80,243 63,890 144,133 US dollar 69,224 -63,458 5,766 Sterling 4,492 1,410 5,902 Yen 2,376 595 2,971 Other 13,274 832 14,106 Total 169,609 3,269 172,878
    • 104 Annual Report 2008 ABP The euro/US dollar exchange rate was volatile in 2008. The dollar was initially weak, stabilised for a period then bounced back, to finish the year weaker than at the outset. An important factor in the short term exchange rate movements of the US dollar against the euro is the relative expectations of growth for the two continents. Movements in 2008 reflected the dramatic consequences of the credit crisis and the impact of the presidential elections. Graph 3: EUR/USD exchange rate movements EUR/USD exchange rate movements 1.60 1.55 1.50 1.45 1.40 1.35 1.30 1.25 1.20 Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2007 2008 Commodity risk The market value of the derivatives position in commodities amounts to € 0.7 billion. The under- lying exposure has a value of € 5.7 billion. This underlying or passive exposure is made up of commodity derivatives and is held as an almost exact replica of the GSCI Total Return Index that serves as the benchmark. There is accordingly almost no active risk in this respect. Nevertheless, the Commodity fund is exposed to an active risk in that some of the assets are invested through external mandates, pursuing specific investment strategies. Credit risk Within the portfolio, ABP bears a credit risk with respect to various companies. Credit risk refers to the risk that a company is no longer able to meet its payment obligations or that its financial situation deteriorates. The ratings of debt instruments issued by that company may deteriorate as a result, which will in turn adversely affect their value. In an extreme case, it is even possible that the principal will not be repaid. To hedge this risk, credit default swaps are purchased. A credit default swap is a kind of insurance against a downgraded credit rating or the insolvency of a particular debtor or basket of debtors. ABP computes the default risk (the risk resulting from a counterparty not being able to meet its financial obligations), taking account of both the probability of default and the potential loss as a consequence. Based on these computations, a picture is formed of the major default risks and credit migration risks (the risk of deteriorating credit ratings for counterparties). The latter measurement is reflected, for example, in the credit rating profile of the portfolio. The two measurements are important indicators used in ABP’s credit risk management.
    • 105 Annual Report 2008 ABP (in € million) 2008 2007 Table 4: Use of credit default swaps Credit risk hedging Protection purchased by means of credit default swaps 4,567 1,970 Protection sold by means of credit default swaps 5,895 19,509 Net protection sold 1,328 17,539 Taking out this insurance (i.e. hedging the risk) by means of a credit default swap is referred to as ‘buying protection’, while assuming a counterparty’s risk is referred to as ‘selling protection’. As at year-end 2008, a net amount of € 1.3 billion of protection had been sold (i.e. assumed as additional risk). Compared with year-end 2007, this represents a sharp decline – in other words, less risk was assumed through credit default swaps. The sharp decline in the protection sold is mainly explained by contracts with banks in connection with satisfying the Basel I and II requirements that were settled in 2008 (amounting to around € 15 billion). Rating profile Credit risk is commonly reflected in a credit rating, with a high credit rating meaning that the debtor’s creditworthiness is very good and there is a high degree of certainty that the principal will be repaid. Apart from the credit ratings awarded by internationally recognised rating agencies, ABP also relies on the analyses produced by the pension administrator’s credit analysts. Credit ratings range from AAA at the top of the scale to C at the bottom. The distribution of ABP’s fixed-income investments is such that more than 87 per cent have a rating of AA/A or above. Securitisation A large part of the investment portfolio fixed-income investments and the reinvested cash collate- ral received in connection with securities lending concerns securitised products. There are many different forms of securitisation. In general, the purpose of securitisation on the part of the originator is to package a large number of loans or mortgages together into a single, marketable product. Investors buy these marketable instruments from the originators of the products, typically banks, and, in doing so, they incur a credit risk vis-à-vis the bank concerned. However, apart from the fact that the originator is partially liable for the payment of interest and repayments, the investor can also lay claim to the flow of payments from the underlying loans, providing an extra level of security. Another advantage of securitised products for investors is that the pooling of the loans itself provides a diversification effect. As the credit crisis has deepened, however, it has become clear that the ratings given to securitised products are proving less and less reliable, owing to an increase in complexity and a lack of transparency. Understanding the structures and monitoring the underlying instruments is crucially important. A team of credit analysts constantly assesses ABP’s portfolio of securitised products and manages it accordingly. Reinvested cash collateral Cash collateral which is received is reinvested, generally in asset-backed and mortgage-backed securities. The credit crisis led to an elevated risk profile for these instruments in the course of 2008, resulting in losses on this portfolio. Underwriting risks Because retirement pensions and surviving dependants’ pensions are payable for life, ABP takes account of the life expectancy of the population of active members, former members and pensioners on the basis of past experience as well as the projections prepared by Statistics Netherlands with regard to future effects. If the mortality trend follows these projections, a man aged 65 in 2050 can expect to live until he is 84.4 (now 82.4) and a woman aged 65 in 2050 can expect to live until she is 86.2 (now 85.3). If life expectancy advances by more than these
    • 106 Annual Report 2008 ABP projections, e.g. to 85.0 years for men and 87.0 years for women, the present liabilities would work out at € 1.5 billion more and the funding ratio would deteriorate by 0.7 percentage points. Indexation risk The indexation to which ABP aspires introduces a wage inflation risk inasmuch as ABP strives to increase the pensions each year in line with pay increases in the government and education sectors. Given the current funding ratio of 90 per cent, there is no scope for any annual increase at all according to the indexation schedule. An increase of 1 percentage point, if it were awarded, would translate into a decrease in the funding ratio of 0.9 percentage points. Liquidity risks The liquidity risk is the risk that the fund will have insufficient cash to meet its current payment liabilities, including pensions for existing pensioners. Since the combined amount of the contri- butions received, direct returns on investments and proceeds from the repayment of investments in fixed-income securities (including sales) far exceeds the combined amount of benefits paid and operating expenses incurred and, moreover, a large part of the investments are in liquid instruments, there is no risk of a cash deficit in normal circumstances. Investing in illiquid asset categories does, however, involved the risk that the fund does not have so much flexibility when it comes to rebalancing the investment portfolio. Forced selling of illiquid assets at short notice is generally only possible at a poor price. To avoid such a situation, the adopted portfolio rebalancing policy takes account of the reduced flexibility with regard to the illiquid asset categories. Even so, in the case of derivatives, the terms of the contracts can require additional payments to be made unexpectedly. Derivatives Derivatives are financial instruments whose value partly depends on one or more underlying financial instruments. Derivatives can be traded on an organised public exchange or directly between two players in the financial sector. In the latter case, the contracts are described as being ‘over-the-counter’ (OTC derivatives). ABP uses both types of instrument. The use of derivatives to reduce or to increase interest rate sensitivity is covered in the sections on interest rate risk, currency risk and credit risk. This section covers the use of derivatives to achieve the desired risk/ return profile for the investment portfolio. For risk management purposes, the greater part of ABP’s use of derivatives is guided by exchange risk exposure policy and tactical decisions concerning maturities in the case of fixed-income in- vestments. Derivatives are also used as an effective means of creating desired exposure relating to certain assets or of modifying the characteristics of a particular investment portfolio. Table 5 analyses the pension fund’s unconsolidated balance sheet before and after derivatives overlay at market value and derivatives exposure.
    • 107 Annual Report 2008 ABP Table 5: The balance sheet and derivatives – general (in € million) Balance sheet Attributed Balance Derivatives Balance Initial at market value market sheet after exposure sheet margin value of attributing including derivatives market value derivatives of derivatives exposure Real estate 18,167 - 50 18,117 - 18,117 - Equities 54,339 - 76 54,263 8,959 63,222 975 Fixed-income investments 91,572 2,571 94,143 - 6,198 87,945 165 Other investments 8,564 1,114 9,678 4,683 14,361 1,680 Derivatives - positive positions 24,927 - 24,927 - - - - - negative positions - 16,394 16,394 - - - - Other assets and liabilities - investments - 9,604 4,974 - 4,630 - 7,444 - 12,074 - - other 1,307 - 1,307 - 1,307 - Available capital 172,878 - 172,878 - 172,878 2,820 Pension liabilities 192,928 - 192,928 - 192,928 - General reserve - 20,050 - - 20,050 - - 20,050 - N.B. Derivatives covers all derivatives including currency forwards and cross-currency swaps. These derivatives are attributed to separate asset categories in the third column. The fifth column shows the cash (generally on short-term deposit) associated with the derivatives exposure. The derivatives exposure is attributed to the related asset categories from the other assets and liabilities relating to investments. An initial margin usually has to be deposited with the counterparty when assuming a position in derivatives. This provides a kind of cushion or security for the occasionally large fluctuations in the value and quoted price of the derivative position. The initial margin is an amount of cash (or suitable securities) that is deposited with the counterparty. If the value of derivatives fluctuates, the initial margin serves as a guarantee for the settlement of any liabilities which arise. Summary Graph 4 shows the way in which the actual funding ratio, the standard funding ratio and the minimum funding ratio changed in the course of 2008. The quarterly figures are partly derived from the internal quarterly reports. The graph reveals that ABP’s funding ratio fell below both the standard ratio and the minimum ratio in the fourth quarter. A recovery plan has accordingly been submitted to the regulator.
    • 108 Annual Report 2008 ABP Graph 4: Funding ratio in 2008 150% 140% 130% 120% 110% 100% 90% Funding ratio Actual funding ratio Standard funding ratio 80% Minimum funding ratio Dec 07 Mar 08 Jun 08 Sep 08 Dec 08
    • 109 Annual Report 2008 ABP (in € million) 31-12-2008 31-12-2007 Notes to the consolidated balance sheet Investments (1) Investments concern real estate, equities, fixed-income investments, derivatives and other investments. Investments are carried at current value. In order of priority, ABP uses the following methods for measuring the carrying amount: 1. mark to market 2. broker quotes 3. external estimates and appraisals 4. mark to model 5. best estimates. Measurement is only tried using an inferior method if a superior method proves impracticable and a best estimate is used as a last resort where there is no active market for a particular asset class and only limited other information is available. This is the case for some of the illiquid investments in particular. There are accordingly uncertainties with regard to carrying amounts, especially for the latter asset class. Of the total carrying amount of the investments (including the item securities under the other assets and liabilities relating to investments), 54 per cent is marked to market, 26 per cent is based on broker quotes, 11 per cent is based on external estimates and appraisals, 8 per cent is marked to model and 1 per cent is based on best estimates. The value of the investment portfolio is therefore largely based on data from independent sources. Only a small proportion of the portfolio’s value is measured using internal models. Movements in investments were as follows: Real estate Equities Fixed- Derivatives Other Total Total income investments investments Opening balance 22,245 90,573 99,295 6,633 6,718 225,464 210,953 Effect of initial consolidation 4 38 149 - 8 199 - Granted/bought 7,899 91,437 128,047 - 6,598 233,981 396,185 Repaid/sold* - 3,804 - 87,004 - 130,795 - - 3,655 - 225,258 - 377,920 Change in value - 8,061 - 39,755 - 4,287 18,476 - 437 - 34,064 - 3,041 Other movements - 315 - 510 641 0 - 471 - 655 - 713 Closing balance 17,968 54,779 93,050 25,109 8,761 199,667 225,464 *Including movements up to the time of disposal. Other movements includes the change in the short position in 2008 relating to the reclassification of the other liabilities relating to investments. The rapid turnover rate in 2008 stems from the pursuit of an active investment policy, reinvesting dividends and rebalancing to restore the desired asset mix. The accounting for mortgage-backed securities in the United States (daily rollover) partly explain the high turnover rate of the fixed-income investments, especially bonds. The volume of this portfolio has, however, decreased.
    • 110 Annual Report 2008 ABP (in € million) 31-12-2008 31-12-2007 The following table analyses the investments by category and by region. Real estate Equities Fixed- Derivatives Other Total Total income invest- investments ments By category Government - - 33,305 - - 33,305 32,794 Financial and investment institutions 215 13,705 48,936 24,928 335 88,119 87,528 Trade and industry 180 26,478 4,723 - - 31,381 49,649 Transport and storage - 1,403 1,379 - - 2,782 3,351 Services 14 6,660 2,171 - 5 8,850 14,227 Real estate 17,559 422 135 - - 18,116 23,107 Other - 6,111 2,401 181 8,421 17,114 14,808 Total 17,968 54,779 93,050 25,109 8,761 199,667 225,464 By region Netherlands 4,046 4,296 8,392 387 - 70 17,051 20,811 Rest of EMU 1,781 9,326 36,638 3,727 434 51,906 65,271 Rest of Europe 3,029 7,439 12,360 20,347 - 10 43,165 30,219 North America 7,309 24,701 34,157 422 8,407 74,996 86,221 Asia/Pacific 1,800 7,572 1,035 58 - 10,465 12,814 Other 3 1,445 468 168 - 2,084 10,128 Total 17,968 54,779 93,050 25,109 8,761 199,667 225,464 Out of the closing balance, the following amounts are: - listed 136,203 185,326 - unlisted 63,464 40,138 Out of the total investments, € 2.3 billion relates to the insurance operations Real estate Real estate includes € 1.6 billion (2007: € 1.6 billion) in non-consolidated equity investments in other entities. Internal appraisals of real estate are made annually. Professional appraisals are made at least once every three years. Equities Equities includes private equity and convertible bonds. Private equity mainly concerns equity investments in unlisted companies, including venture capital investments. Of the total private equity, € 0.1 billion is invested in direct investments (2007: € 0.2 billion) and € 6.7 billion in indirect investments (2007: € 7.2 billion). Fixed-income investments Fixed-income investments comprise investments in bonds, index-linked bonds, private loans and mortgage loans. Of the total fixed-income investments, € 5.2 billion (2007: € 4.6 billion) relates to high-yield credits. In respect of a proportion of the fixed-income investments recognised in the balance sheet, amounting to € 1.2 billion (2007: € 1.4 billion), ABP enjoys only the beneficial ownership. This concerns pledged mortgages. Derivatives The derivatives with a positive position are made up of futures (€ 1.1 billion), options (€ 0.6 billion), interest rate swaps (€ 16.7 billion) , credit default swaps (€ 0.3 billion), inflation-linked swaps
    • 111 Annual Report 2008 ABP (€ 0.5 billion ), other swaps (€ 0.2 billion) , cross-currency swaps (€ 0.2 billion) and forward foreign contracts (€ 5.6 billion). Other investments Absolute return strategies concern external investments in hedge funds and internal active strategies. Other assets and liabilities relating to investments (2) Securities ABP makes part of its portfolios of bonds and equities available for securities lending and has only the beneficial ownership of that part of the portfolio. Equities on loan amount to € 13.6 billion (2007: € 15.1 billion) and bonds on loan amount to € 22.5 billion (2007: € 22.7 billion), making a total of € 36.1 billion. Collateral security, generally in the form of cash on which interest at short- term borrowing rates has to be paid, is furnished at the time of lending. The cash collateral is reinvested. The market value of the reinvested cash collateral as at year-end amounted to € 33.2 billion. Cash collateral is reinvested in fixed-income securities with a short remaining term to maturity on average and is included in securities in the balance sheet presentation. These assets are treated as current assets on the basis of a model which takes account of fixed spreads and includes empirical parameters for the probability of premature redemption of securitised mortgages. That introduces uncertainties with regard to the calculation of the average term to maturity. The average legal maturity, however, without allowing for premature redemption, is longer. The following table presents the current values and the average terms to maturity of the reinvested cash collateral. Current value Average (in € billion) term remaining to maturity (in years) Securitised products 9.9 1.6 Corporate loans 5.3 1.5 Short-term money market products 18.5 0.005 Net working capital - 0.5 n/a Overall 33.2 0.7 The methods used to measure the carrying amount are employed in the order of priority mentioned above. Given the current state of the market, there are inevitably uncertainties with regard to the measurements of illiquid investments in particular, especially as regards ‘tail uncertainty’. Market volatility was exceptionally high last year and continues to be so. Small transaction volumes can have a relatively large impact on prices. There is no such thing as objective quoted market prices for cash collateral reinvested in securitised mortgages. And comparable trades are not always available. The lack of an active market and the limited availability of information mean that best estimates have to be used for measurement purposes in a number of cases. As a consequence, it is estimated that the uncertainty surrounding the current value of that part of the reinvested cash collateral which is measured on the basis of best estimates (€ 2.3 billion) lies within a bandwidth of around 20 per cent.
    • 112 Annual Report 2008 ABP (in € million) 31-12-2008 31-12-2007 The movements in the item securities are presented below. In view of the high turnover rate, the analysis does not show purchases and sales but the net movements in the amount of the portfolio. (in € billion) Opening balance 31.4 39.3 Net movements 3.8 - 7.4 Unrealised gains and losses - 2.0 - 0.6 Closing balance 33.2 31.4 Of the market value of the reinvested cash collateral, totalling € 33.2 billion (2007: € 31.4 billion), € 30 billion has been recognised as securities and € 3.2 billion as cash (short-term lending). The repayment obligations, with a face value of € 35.8 billion (2007: € 32.0 billion), are entirely accounted for in payables, accruals and deferred income. The rating profile of the above portfolio is: AAA AA A BBB ≤BB None 80.5% 7.5% 4.8% 2.0% 2.5% 2.7% As is apparent from the above, 93 per cent of the reinvested cash collateral has a rating of A or higher. Cash and short-term lending Cash and short-term lending can be analysed as follows: - short-term lending to banks 14,611 12,147 - current account bank balances 8,672 8,156 The current account bank balances include amounts invested on the money market as call money. An amount of € 2.8 billion of the total cash is not freely available, being cash balances on margin accounts held in connection with futures positions. A credit arrangement totalling € 4.3 billion secured by a pledge together with an intraday credit facility totalling € 4.5 billion has been contracted with ABN-AMRO and an intraday credit facility of € 0.2 billion has been contracted with ING Bank. At the end of December, a € 3 billion repo facility was contracted with Rabobank, with a securitised parcel of mortgages given as security. No use was made of this facility. Long-term liabilities ABP subsidiaries have contracted loans from third parties totalling € 95 million. This concerns loans amounting to € 20 million due within one year and € 75 million due after more than five years. No security has been furnished by the subsidiaries for these loans. Payables, accruals and deferred income The repayment obligation in respect of cash collateral received in connection with securities lending included in the payables amounts to € 35.8 billion.
    • 113 Annual Report 2008 ABP (in € million) 31-12-2008 31-12-2007 The item includes negative positions in derivatives, analysed as follows: - futures - 957 - 371 - options - 512 - 15 - swaps - 13,909 - 4,530 - cross-currency swaps - 13 - 299 - forward foreign exchange contracts - 1,003 - 419 - short position - 4,974 - 4,865 Total - 21,368 - 10,499 Swaps includes interest rate swaps amounting to € 12.7 billion, credit default swaps amounting to € 0.3 billion, inflation-linked swaps amounting to € 0.7 billion and other swaps amounting to € 0.2 billion. The bank overdrafts included in the payables, accruals and deferred income total € 1.0 billion. The payables also concern various cash collateral positions totalling € 8.1 billion and payables in respect of fixed-income securities totalling € 12.8 billion. The active spread policy and the method of accounting for mortgage-backed securities in the United States (daily rollover) explain the high volume of the liabilities, of € 12.8 billion, which are predominantly of a short-term nature. Short-term lending and borrowing The short-term lending and borrowing includes a net liability of € 7.2 billion in respect of repo operations, relating to bonds. A fee is charged for entering into these repurchase agreements. Cash deposits are temporarily obtained to cover the risk of non-return, which are invested according to strict rules with the object of generating additional returns. Other assets and liabilities (3) This item comprises miscellaneous assets and liabilities not attributable to investment operations. Intangible assets - goodwill 43 - - other 4 - 47 - Tangible assets - buildings 89 73 - other 49 33 138 106 The estimated useful life of the buildings, which are currently undergoing renovation, is 30 years. Other concerns office equipment and furniture, with an estimated useful life of 15 years, and computers, with an estimated useful life of between 2 and 5 years. Receivables, prepayments and accrued income This item is made up of: - receivables from employers 527 494 - receivables in respect of value transfers 150 146 - receivables from participants 8 8 - other receivables 622 304 1,307 952
    • 114 Annual Report 2008 ABP (in € million) 31-12-2008 31-12-2007 Cash An amount of € 7.8 million of the cash is not freely available. Long-term liabilities - 61 - An ABP subsidiary has borrowed a total of € 61 million from a third party on a long-term basis. The loans fall due after more than five years. No security has been provided for the loans by the subsidiary. Payables, accruals and deferred income This item is made up of: – payables in respect of value transfers -0 -2 – payables in respect of pensions - 242 - 515 – other payables - 370 - 299 - 612 - 816 Provision for pension liabilities (4) The provision for pension liabilities has been calculated on the basis of the nominal interest rate term structure published by DNB. This is comparable to a discount rate derived from a market interest rate of 3.57 per cent (2007: 4.85 per cent). The movements in the provision for pension liabilities for the various schemes were as follows: OP/NP AOP FP AEP Total Total Opening balance 150,844 2,188 1,512 131 154,675 156,414 Add: – pension accrual/contributions 3,869 -10 3 22 3,884 4,351 – indexation - - - - - 6,670 – interest 7,060 96 64 - 20 7,200 6,630 – change in respect of value transfers 254 - - 25 - 229 382 – change in market interest rate 33,128 122 81 - 33,331 -14,026 – change in actuarial assumptions 71 - - - 71 497 – other movements 167 -60 - 16 - 91 - 166 44,549 148 107 2 44,806 4,338 Less: – benefit payments 5,933 328 215 - 6,476 6,005 – disbursement expenses 60 15 2 - 77 72 5,993 343 217 - 6,553 6,077 Closing balance 189,400 1,993 1,402 133 192,928 154,675 Of which: – for active members 86,859 - 974 - 87,833 63,623 – for former participants 10,423 - 9 - 10,432 6,957 – for existing pensioners 85,934 1,993 419 - 88,346 78,556 – other 6,184 - - 133 6,317 5,539 Total 189,400 1,993 1,402 133 192,928 154,675 The share of the final pay scheme for career military personnel in the retirement benefit/surviving dependants’ benefit (OP/NP) pension liabilities totalling € 189.4 billion was € 4.5 billion.
    • 115 Annual Report 2008 ABP (in € million) 31-12-2008 31-12-2007 In view of the financial position, the Board of Governors fixed the indexation factor applicable with effect from the beginning of 2009 at 0 per cent of the contractual pay increase for 2008 of 4.73 per cent (as at 1 November 2008). This applies both to pensions already in payment, to deferred pensions and to pensions being built up by active participants. For disbursement expenses, there is a supplementary allowance calculated into the provision for pension liabilities. Collection costs are covered by supplements included in the contributions. Other in the analysis of the closing balance concerns the provision for transitional supplements connected with the privatisation of ABP (OPA), amounting to € 6.2 billion, and the provision for ABP ExtraPensioen, amounting to € 133 million. The provision for ABP privatisation supplements as far as civilians are concerned relates to the transitional supplements referred to in Annex K of the pension plan rules and, as far as career military personnel are concerned, to the transitional arrangements contained in Articles 17.6.3, 17.7.3, 17.7.8 and 17.8.3 of the pension plan rules. These arrangements form part of the conversion operation aimed at having a neutral effect in connection with the privatisation of all existing and future pension obligations at the time of transition from the ABP Act to the ABP pension rules. The disability/incapacity pensions column (AOP) includes both the schemes under the old Dis- ablement Insurance Act (WAO) and those under the new Work and Income (Ability to Work) Act (WIA), in other words all the old disability pensions (IP) and redeployment benefits (HPT) and the new ABP incapacity pensions (AAOP). As regards the ABP ExtraPensioen (AEP), there is a guarantee as far as the amount of the con- tributions is concerned but the value fluctuation risk is borne by the policyholders. Provision for insurance liabilities (5) The provision for insurance liabilities concerns the most accurate possible estimate of the future liabilities of the insurance operations. These liabilities relate to both life insurance and non-life insurance. The reinsured part of the provision for non-life insurance is included in the other assets and liabilities, with the total amount of the liabilities (gross) included in the provision for insurance liabilities. The movements in the provision for insurance liabilities were as follows: Proprietary Policy- Total Total risk holders’ risk Opening balance 2,102 198 2,300 2,214 Effect of initial consolidation 86 66 152 - Contributions and other additions 597 14 611 404 Added interest 176 - 45 131 36 Profit-sharing/indexation -6 - -6 10 Utilised for expenses - 296 -1 - 297 - 233 Utilised for benefits - 11 -2 - 13 - 12 Other movements - 116 - 17 - 133 - 119 Closing balance 2,532 213 2,745 2,300
    • 116 Annual Report 2008 ABP (in € million) 31-12-2008 31-12-2007 The closing balance of € 2.7 billion can be analysed as follows: – life insurance involving proprietary risk 1,959 1,606 – non-life insurance involving proprietary risk 573 496 Subtotal insurances involving proprietary risk 2,532 2,102 – life insurance involving policyholders’ risk 213 198 Total 2,745 2,300 General reserve (6) The general reserve is the difference between the fund assets and the provision for pension and insurance liabilities. The movements were as follows: Opening balance 61,838 52,474 Fund result - 81,888 9,364 Closing balance - 20,050 61,838 Apart from providing a source of funding to cover unexpected deficits, the general reserve can also be drawn on to fund future indexation rounds. The law requires pension funds to maintain a general reserve (the Pensions Act refers to minimum required capital) of at least 4.4 per cent of the provision for pension liabilities. This is to be seen as a mandatory reserve. As at year-end 2008, the minimum reserve works out at € 8.4 billion for ABP. If the general reserve falls below that level, the deficit has to be made up within three years. Since ABP does not satisfy the legal requirements in this sense, there is a funding deficit and a recovery plan has accordingly been submitted. In view of the exceptional situation on the financial markets, the three-year recovery period has been extended to 5 years.. Under the Financial Assessment Framework (FTK) rules, pension funds also have to maintain a certain level of capital depending on the level of the various risks to which they are exposed. As at year-end 2008, the required capital amounted to € 45.5 billion (see Table 2 in the section on risk management for details). If the general reserve falls below that level, the deficit has to be made up within 15 years. The recovery plan also takes this requirement into account. A recovery plan has now been submitted to the regulator. This plan involves three measures, viz.: – altering the risk profile of the invested capital – charging a recovery supplement on top of the cost-covering level of contributions for as long as the funding deficit persists – exploring the possibility of funding the temporary recovery supplement in advance for a period of five years (or other forms of immediate capital injection) so as to obtain an immediate improvement in the financial position. Under this recovery plan, the reserve deficit should be cleared within the statutory period of 15 years. As regards the funding deficit, the Minister of Social Affairs and Employment has relaxed the recovery period to 5 years. The recovery plan satisfies this time horizon without the need for additional measures. However, the Board of Governors has decided to charge a recovery supplement on top of the cost-covering level of contributions for the duration of the recovery period in order to increase the fund’s recovery capacity.
    • 117 Annual Report 2008 ABP Liabilities not shown on the face of the balance sheet General As at balance sheet date, commitments totalling € 5.7 billion (2007: € 4.7 billion) had been entered into in respect of real estate investments. Commitments to pay in capital when called up have likewise been contracted in respect of private equity investments, amounting to € 6.0 billion (2007: € 4.8 billion) as at balance sheet date. ABP maintains a collateral fund for exchange of collateral in connection with current derivatives transactions. As at balance sheet date, the total value of the collateral fund was € 4.1 billion (2007: € 3.7 billion), of which € 0.6 billion (2007: € 1.6 billion) was pledged to third parties. Commitments had been entered into for absolute return strategies as at balance sheet date amounting to € 0.9 billion (2007: € 1.2 billion). Current rental contract commitments amounted to € 92.3 million as at balance sheet date (2007: € 43.7 million). Commitments totalling € 20.2 million (2007: € 26.4 million) have been entered into in connection with the renovation of the buildings used by the company. As at year-end 2008, ABP had committed itself to investing a total of € 3.8 million in computer hardware and software. As at balance sheet date, there were outstanding commitments in respect of current maintenance contracts and data lines totalling € 4.2 million, of which € 1.9 million is due within one year and € 2.3 million is due after more than one year but within five years. The liabilities in respect of ongoing vehicle leasing contracts amount to € 15.0 million (2007: € 15.7 million), of which € 5.9 million (2007: € 4.4 million) is due within one year and € 9.1 million (2007: € 11.3 million) is due in the period between one and five years after the balance sheet date. Leasing costs of € 7.3 million (2007: € 5.5 million) were recognised in the year. The leasing liability has been calculated by the leasing company on the basis of depreciation plus allowances for fuel, insurance and servicing. General The group Alternatief Voor Vakbond (AVV) together with ten other parties brought a case against ABP before the subdistrict court at Heerlen, challenging the age distinction in ABP’s new pension rules, which came into operation with effect from 1 January 2006. ABP is represented in this matter by E. Lutjens. The district court at Maastricht threw out the claim in its judgement of 23 January 2008. The AVV then took the case to appeal in the Court of Appeal at ‘s-Hertogenbosch. The court’s ruling is expected in the second half of 2009. If the appeal court upholds the AVV’s request to put prejudicial questions before the European Court of Justice, the proceedings will be considerably extended. The average duration of a case in the Court of Justice is approximately 20 months.
    • 118 Annual Report 2008 ABP (in € million) 2008 2007 Notes to the consolidated statement of income and expenses Income Net contributions (7) Contributions from affiliated employers and employees are analysed by category below, together with a number of underlying variables. Contributions by category OP/NP AAOP Other Total Total Employers’ contributions 4,408 86 - 4,494 4,238 Employees’ contributions 2,100 29 652 2,781 2,455 6,508 115 652 7,275 6,693 Less: collection cost supplements - 54 -4 - - 58 - 55 Net contributions 6,454 111 652 7,217 6,638 Supplementary information: – contribution rate (%) 19.6 0.5 - – ANW top-up rate (%) 0.4 - - For military personnel there are different contribution rates , viz. 20.8 per cent for OP/NP and 0.6 per cent for the ANW top-up. The AAOP scheme does not apply to military personnel. The number of affiliated employers as at year-end 2008 was 3,985 (2007: 3,999). It is they who are responsible for actual payment of the entire amount of the contributions, i.e. including employees’ contributions The contributions figure includes the finalised difference in estimates for the preceding year. Other concerns AEP contributions of € 28 million, insurance-related contributions of € 621 million and a residual item of FP contributions amounting to € 3 million. The total contributions represent the actual level of contributions demanded by the pension fund during the year. This is defined as the damped, cost-covering level of contributions plus any markups or markdowns in connection with a recovery plan, for example, or discounts on the level of contributions. Since there were no markups or markdowns, the actual level of contributions was equal to the damped, cost-covering level of contributions. The Pensions Act stipulates that the undamped, cost-covering level of contributions also has to be disclosed, i.e. the level of contributions based on the nominal market interest rate at the start of the year (4.85 per cent). The composition of the contributions has to be disclosed as well and the following table provides the required analysis. Pension fund Actual Cost-covering contributions Damped Undamped Total contributions 6,527 6,527 6,527 Of which: a. portion for vested liabilities 3,208 3,208 4,162 b. markup to cover administrative expenses 130 130 130 c. markup for solvency margin 828 828 1,074 d. portion for contingent liabilities 2,361 2,361 1,161 e. markups/markdowns on the damped, cost-covering contribution level - - -
    • 119 Annual Report 2008 ABP (in € million) 2008 2007 The level of the total contributions is based on a prudent estimate of the expected real rate of return on the investments in the long term, of 3 per cent. The portion of the contributions for the vested liabilities is based on the expected actual long-term rate of return for both the actual and the damped, cost-covering level of contributions, of 6.1 per cent, and on the nominal market interest rate at the start of 2008, of 4.85 per cent, for the undamped, cost-covering level. A com- parison of the different elements in the overall level of contributions clearly illustrates the effect of damping, i.e. inclusion of expected additional returns (with the damped approach) or exclusion of any additional returns (with the undamped approach). The markup to cover administrative expenses comprises a markup for collection costs and a markup for disbursement costs (for both the nominal and actual liabilities). The contribution element for the contingent liabilities and the contribution element for the solvency margin are both available for funding the contingent liabilities. In this integral approach, element d. of the contributions is the balancing item. Depending on the level of the nominal market interest rate, the portion of the contributions covering the contingent liabilities will increase or decrease. The lower the nominal market interest rate, the more expensive the vested liabilities become and the lower the funding available for the contingent liabilities. Investment results (8) The investment results comprise results on real estate investments, equities, fixed-income investments, derivatives and other investments. These elements are discussed below. The result on investments was made up as follows: Net result on Real estate Equities Fixed- Derivatives Other Total Total investments income investments investments Direct result 745 1,885 4,200 - 102 503 7,231 7,196 Indirect results – price movements - 7,332 - 40,150 - 7,274 3,133 - 800 - 52,423 2,125 – currency movements - 140 299 1,008 - 1,143 2,310 - 8,595 – currency derivatives - - - - 781 - - 781 7,198 Expenses - 25 - 196 - 119 - - 161 - 501 - 476 Subtotal - 6,752 - 38,162 - 2,185 2,250 685 - 44,164 7,448 Results on investments for third parties 11 4 -1 -0 15 29 11 Minority interests 21 - - - - 21 -3 Net result on investments - 6,720 - 38,158 - 2,186 2,250 700 - 44,114 7,456 The direct results relate to nominal interest income, dividends and rental income. The pension fund is exempt from dividend tax. The indirect results are the sum of the movements in the current value of the investments and the currency movements. The currency hedging results are attributed to the asset classes to which they relate. The indirect results for the derivatives are the results of absolute return strategies with a controlled risk. The expenses comprise costs of external managers and management costs charged by the administrator. Internal costs which cannot be allocated directly are allocated in proportion to the capital invested. The result on investments includes the results on securities lending activities, totalling € 1.8 billion negative (2007: € 0.4 billion negative). This figure is made up of direct reinvestment results and lending fees amounting to € 1.5 billion (2007: € 2.2 billion), interest payable on cash collateral and costs amounting to € 1.3 billion negative (2007: € 2.0 billion negative) and unrealised gains and losses amounting to (€ 2.0 billion negative (2007: € 0.6 million negative). Unrealised results will only be realised if counterparties are unable to settle their payment obligations.
    • 120 Annual Report 2008 ABP (in € million) 2008 2007 Expenses Benefit payments (9) Benefit payments comprises the actual amounts paid out in retirement and surviving dependants’ pensions (OP/NP), incapacity/disability pensions (AOP), flexible pension (FP) benefits and benefits payable under the life and non-life insurance policies. The analysis of the amounts and numbers of recipients concerned is as follows: Benefit payments by type OP/NP AOP FP Insurance Total Total Amount - 6,014 - 351 - 218 - 328 - 6,911 - 6,507 Number of recipients as at year-end 597,000 70,000 83,000 - Movements in provisions for liabilities Pension accruals (10) Increase in provision for pension liabilities - 3,884 - 4,351 Increase in provision for insurance liabilities - 611 - 404 - 4,495 - 4,755 This item reflects the effect of one year’s additional service (or notional service in the case of those qualifying for incapacity benefit) and mortalities on the pension liabilities for active members calculated on a nominal interest rate basis. The main factor behind the lower amount added to the provision for pension liabilities in 2008 was the higher discount rate (4.85 per cent) compared with 2007 (4.25 per cent). As regards the insurance operations, the amount included in this item is the increase in the provision due to new obligations. Indexation (11) - - 6,670 The value of the members’ pension rights increases annually with the results of indexation rounds, in addition to the actual pension accruals. It was decided in 2008 not to award any annual increase at all for the year beginning 1 January 2009. Added interest (12) Addition of interest to provision for pension liabilities at nominal market interest rate of 4.70 per cent (2007: 4.25 per cent) - 7,200 - 6,630 Addition of interest to the provision for insurance liabilities - 125 - 46 Total - 7,325 - 6,676 The value of the members’ pension rights also increases annually with the accrual of interest, in addition to the actual pension accruals. For the pension fund, this means an increase in liabilities and hence requires an addition to the provision for pension liabilities, which represents an expense. These costs relating to the increased liabilities should in principle be met from the results achieved on the investment of the pension capital. With effect from 2008, the interest cost for the year is no longer calculated using the discount rate based on market interest rates used to calculate the liabilities as at the preceding year-end (year-end 2007: 4.85 per cent) but using the 1-year interest rate taken from the published interest rate term structure as at the preceding year-end (year-end 2007: 4.70 per cent), giving a more accurate result. As regards the insurance operations, the amount added differs according to the product. For unit-linked products, the addition of interest depends on the change in value of the underlying investments and, for the majority of the other products, the addition is made at an interest rate based on the yield curve (published by DNB) as at 31 December 2008.
    • 121 Annual Report 2008 ABP (in € million) 2008 2007 Provision utilised for benefit payments and administrative expenses (13) 6,921 6,377 – utilised for funded benefit payments 6,476 6,005 – utilised for insured benefit payments 297 233 Total utilised for benefit payments 6,773 6,238 Future benefit payments are calculated actuarially in advance, based on probability systems, and are included in the provision for pension liabilities. This provision represents the present value of the expected future benefits. Each year, an amount of the provision is utilised to fund the benefits for that year. This item also includes the results on probability systems. – met out of cost supplement in pension contributions 58 55 – met out of disbursement cost allowance in provision for pension liabilities 77 72 – met out of cost allowance in provision for insurance liabilities / deduction from investment returns 13 12 Total utilised for administrative expenses 148 139 The collection costs included in the administrative expenses are met by a supplement included in the pension contributions and the disbursement costs are met out of an allowance in the provision for pension liabilities. For 2008, the collection cost supplement for the OP/NP scheme amounted to 0.17 per cent of the OP/NP contribution base (2007: 0.17 per cent) and the disbursement cost allowance for the OP/NP scheme amounted to 1.05 per cent of the provision (2007: 1.05 per cent). For the disability/incapacity pension schemes, the collection cost supplement amounts to 0.02 per cent and the disbursement cost supplement amounts to 4.60 per cent. The costs of the insurance operations are met partially out of a deduction from the contributions, partially out of allowances in the provisions and partially out of a deduction from the returns on investments. The latter two components are included in the present item. Change in market interest rate (14) - 33,331 14,026 At the beginning of 2008, the interest rate term structure published by DNB corresponded to a nominal interest rate of 4.85 per cent and, at the end of 2008, to a nominal interest rate of 3.57 per cent. This decrease led to a sharp increase in the provision for pension liabilities. Change in actuarial assumptions (15) - 71 - 497 This concerns changes relating to the provision for transitional supplements connected with the privatisation of ABP (OPA) Change in respect of value transfers (16) – value transfers out (actuarial gains and losses) 134 181 – value transfers in (actuarial gains and losses) - 363 - 563 Total - 229 - 382 Other movements (17) – other gains and losses relating to pension funding - 91 166 – other gains and losses relating to insurance 133 119 Total 42 285 Net value transfers (18) – value transfers out (funding gains and losses) - 132 - 175 – value transfers in (funding gains and losses) 392 495 Total 260 320
    • 122 Annual Report 2008 ABP (in € million) 2008 2007 Administrative expenses (net) (19) The administrative expenses can be analysed as follows: Salaries - 217 - 203 Social security charges - 18 - 13 Pension charges - 14 - 24 Other staff costs - 39 - 38 Depreciation - 17 - 11 Other operating expenses - 153 - 179 Subtotal - 458 - 468 Less: work on behalf of third parties 108 57 Subtotal - 350 - 411 Less: met from investment results 186 187 Net administrative expenses - 164 - 224 The deconsolidation of the joint ventures Alpinvest Partners NV, Oeral Investments BV and Patroffi- ce BV and the merger with another pension administrator have led to changes in the pattern of administrative expenses. The impact of these changes is minor but there has been an increase in the costs recoverable in respect of work on behalf of third parties. Other operating expenses includes the cost of temporary staff, ICT costs and premises costs and, with regard to several consolidated subsidiaries for 2008, a net positive item in respect of corporation tax. As required by CAR 271, the pension charges are recognised partly on a defined benefit basis and partly on a defined contribution basis. The average number of staff of the pension fund was: 2008 2007 Full-time equivalents – ABP 8 2,239 – consolidated entities 3,867 678 Individual employees – ABP 9 2,440 – consolidated entities 4,197 732 Of whom, employed outside the Netherlands 103 150 The average analysis is as follows: – management and corporate staff 386 235 – operating units 2,204 1,828 – service units 1,616 1,109 The average figures have been calculated with effect from the date of unbundling of the admini- strative organisation and, in 2008, also include the employees of Cordares. The drop in the number of full-time equivalent staff working for ABP results from the creation of the independent pension administrator APG. Other income and expenses (20) 312 – 27 This item mainly concerns an amount to cover the increased costs of retirement benefits as people continue to work beyond the reference age of 62. The funding is provided by the early retirement fund (VUT). Also included in the item is a tax benefit amounting to € 160 million arising at the time of relinquishing the self-administered status.
    • 123 Annual Report 2008 ABP (in € million) 31-12-2008 31-12-2007 Notes to the consolidated statement of cash flows The variances between movements in the items in the statement of income and expenses and the items in the statement of cash flows are set out below. Short-term lending and borrowing The cash flows relating to short-term lending and borrowing have been presented as a net amount. Investment results Unrealised changes in the value of investments are not included in the statement of cash flows. Other expenses paid Depreciation charges have been eliminated. Cash The balance of cash as at year-end, amounting to € 7.8 billion, is made up as follows: Cash included in: – other assets and liabilities relating to investments 7,695 5,926 – other assets and liabilities 146 419 Total 7,841 6,345
    • 124 Annual Report 2008 ABP (in € million) 2008 2007 Other notes Actuarial analysis Separate actuarial analyses are presented for the pension fund and the insurance operations. Pension fund In the actuarial analysis for the pension fund, the results achieved on the indirect capital investment in the insurance operations are recognised in the investment result. Result on contributions Net contributions 6,596 6,205 Pension accruals - 3,884 - 4,351 2,712 1,854 Result on investments Investment results - 44,068 7,456 Indexation - - 6,670 Added interest - 7,200 - 6,630 Change in market interest rate - 33,331 14,026 - 84,599 8,182 Result on benefit payments and administrative expenses Benefit payments and administrative expenses - 6,760 - 6,339 Utilised out of provision for pension liabilities for benefit payments and administrative expenses 6,611 6,132 - 149 - 207 Other results Other income and expenses 279 - 72 Net value transfers 260 320 Actuarial gains and losses Change in provision for pension liabilities in respect of value transfers - 229 - 382 Change in actuarial assumptions regarding ABP privatisation transitional arrangements - 71 - 497 Other changes in provision for pension liabilities - 91 166 148 - 465 Total result - 81,888 9,364 Notes The overall result of € 81.9 billion negative is largely determined by the result on investments of € 84.6 billion negative, which is made up of investment results of € 44.1 billion negative and the interest cost added to the provision for pension liabilities of € 7.2 billion, calculated at the market interest rate. Finally, there is also a loss of € 33.3 billion due to the decline in the interest rate term structure from the year-end 2007 level (average of 4.85 per cent) to the year-end 2008 level (average of 3.57 per cent). Insurance operations Result on investments - 297 -9 Result on benefit payments and administrative expenses - 21 -8 Other actuarial results 75 51 Other results - 1 Total result (before tax) - 243 35 The actuarial analysis relates solely to the life and non-life insurance operations and is exclusively the result of several equity investments other than insurance companies.
    • 125 Annual Report 2008 ABP Segment information (in € million) Balance sheet as at year-end 2008 Pension fund Insurance Admini- Elimina- Consoli- including operations strative tions dated investment organisation subsidiaries Assets 173,751 2,840 611 - 1,579 175,623 Investments 197,457 2,259 66 - 115 199,667 Other assets and liabilities, net - 23,706 581 545 - 1,464 - 24,044 Reserves and liabilities 173,751 2,840 611 - 1,579 175,623 Reserves - 19,177 95 611 - 1,579 - 20,050 Provisions for liabilities 192,928 2,745 - - 195,673 Statement of income and expenses for 2008 Pension fund Insurance Admini- Elimina- Consoli- including operations strative tions dated investment organisation subsidiaries Income - 36,466 415 572 - 1,279 - 36.758 Contributions 6,596 621 - - 7,217 Investment results - 44,012 - 238 - 18 154 - 44,114 Other income 950 32 590 - 1,433 139 Expenses - 44,550 - 711 - 498 561 - 45,198 Movement in liabilities - 38,253 - 292 - - - 38,545 Benefit payments - 6,583 - 328 - - - 6,911 Other expenses 286 - 91 - 498 561 258 Result before tax - 81,016 - 296 74 - 718 - 81,956 Tax - 73 -5 - 68 Result after tax - 81,016 - 223 69 - 718 - 81,888
    • 126 Annual Report 2008 ABP 2008 2007 Remuneration of board members (in euros) The remuneration of board members is made up of the remuneration paid to members of the Board of Governors, members of the Committees and, up to 29 February 2008, members of the Board of Directors. Board of Governors Salaries/ Pension attendance charges fees - LC Brinkman, 58,922 9,020 67,942 66,991 - Other members 644,163 - 644,163 548,495 Total 703,085 9,020 712,105 615,486 The chairman of the Board of Governors is paid a salary which is increased in line with CLA pay rises. A CLA increase of 2.25 per cent was awarded with effect from 1 April 2008. In December 2008, a single payment amounting to 0.25 per cent of the regular salary for 2008 was made. The remuneration payable to the other members is in the form of attendance fees. The amount payable depends on the number of Board of Governors and Committee meetings attended by the individual members. In connection with the unbundling of the administrative organisation and the effects of the credit crisis, the number of meetings in 2008 was higher than in the preceding year. No loans, advances or guarantees have been granted to members of the Board of Governors. Committees Audit Committee 21,624 - Appeals Committee 36,665 34,588 Investment Committee 157,919 85,000 Participants’ and Employers’ Council 142,690 152,582 Accountability Body - n/a Total 358,898 272,170 The above attendance fees for Committee members are payable to outside members of the Committees. In 2008, the Investment Committee was expanded by two additional members. The fixed remuneration of the members was also increased. Board of Directors Salaries Other Pension Variable Long-term staff costs charges remuneration incentives DM Sluimers 52,067 7,881 11,339 0 14,696 85,983 612,698 ABJ ten Damme 42,533 6,959 7,474 0 12,005 68,971 34,504 JML van Engelen 42,533 6,959 7,474 0 12,005 68,971 - JF Maassen 42,196 6,524 9,213 0 - 57,933 417,910 RMSM Munsters 51,670 9,302 9,995 0 17,500 88,467 553,700 JWE Neervens † - - - - - - 15,257 Total 230,999 37,625 45,495 0 56,206 370,325 1,634,069 The remuneration of the members of the Board of Directors relates to the period 1 January to 29 February 2008, viz. the period for which the members were in office as the Board of Directors of ABP. In connection with the relinquishing of self-administered fund status, the Board of Directors
    • 127 Annual Report 2008 ABP was transferred to the pension administrator, the conditions of employment of the members remaining unchanged. Since the economic risk of the administrative organisation of ABP has been born by the pension administrator with effect from 1 January 2008, the remuneration of the Board of Directors has not been included in the company statement of income and expenses. The other staff costs include such items as holiday allowances, regular year-end bonus and childcare allowances, in addition to employers’ contributions. The variable remuneration received depends on the achievement of set targets and is tied to the annual pay enjoyed in 2008. Four performance targets are used in calculating the amount of the variable remuneration for the members of the Board of Directors, which cannot exceed more than 25 per cent. The four targets, which are set each year, are investment return, cost performance, level of service and fund result. For the investment return, there is a standard target figure of 7 per cent averaged over three years. The cost performance standard is based on the fund’s ranking among the top 25 per cent of pension funds in the world in terms of cost efficiency. The service level target is to occupy a leading position worldwide. The fund result is assessed on the basis of the percentage increase awarded in the annual indexation round. The degree of indexation is an element which cannot be directly controlled by the Board of Directors because it depends both on the funding ratio and on the developments in general pay levels. ABP gives a heavy weighting to the indexation figure in the variable remuneration, reflecting the pension fund’s political and social position and demonstrating that, if the fund’s financial position demands a reduction in the level of indexation, it will have a similar effect on the remuneration of the Board of Directors. Having achieved the performance targets, the members of the Board of Directors should have been entitled to bonuses of 12.5 per cent but have voluntarily waived this right. Long-term incentive (LTI) schemes have also been agreed with members of the Board of Directors. The incentive takes the form of an annual payment into a separate account which attracts a rate of return linked to that achieved by ABP. Mr Sluimers’ LTI scheme runs for six years, commen- cing 1 February 2003. The schemes for Messrs Ten Damme and Van Engelen run for four years, commencing 1 January 2008. That for Mr Munsters expired in 2008 and was replaced by a new scheme, running for five years. Business volume Business volume, as defined by the Pension Funds Guideline (CAR 610), amounted to € 13.8 billion in 2008 (2007: € 13.4 billion). Business volume is the sum of the gross contributions and direct investment income. The specific definition of business volume which is applicable to pension funds, as laid down in CAR 610, means that it is not possible to reconcile the above figure with the figures in the statement of income and expenses and the segment information.
    • 128 Annual Report 2008 ABP Summary of the principal consolidated equity investments Entity Established in Held Core activity in % ABP Asia Infrastructure NV Amsterdam 100 Infrastructure investment ABP Asia Real Estate NV Amsterdam 100 Real estate investment A&C Holdings Ltd Cayman islands 80 Commodities investment APG Groep NV Heerlen 100 Investment in and provision of services to other companies and conduct of insurance operations BRD Vastgoed Holding BV Heerlen 100 Management company for investments in Germany Britannica Ltd Jersey 100 Real estate investment CHEP Fund Ltd Jersey 100 Real estate investment CRM Fund Limited Jersey 100 Real estate investment Externe Hypothecaire Beleggingen Heerlen BV Heerlen 100 Holding company Imagem CV Hilversum 98 Innovation investment ING Kantoren Bewaar- Maatschappij II BV The Hague 100 Custody of assets Koala Property Inv. Pty Ltd Sydney 100 Real estate investment Kookaburra Investments LLC Delaware 100 Real estate investment Limetree Investments Inc. Delaware 100 Holding company Lumbercy BV Amsterdam 100 Real estate investment Mauro BV Amsterdam 100 Real estate investment New Emerging Linkers LLC Delaware 100 Investment in hedge funds New Holland Absolute Return Fund I Ltd Cayman islands 100 Investment via hedge funds New Holland Absolute Return Fund II Ltd Heerlen 100 Acting as managing partner in limited partnerships Oiltree Investments Inc Delaware 100 Holding company Oiltree Investments Holdings BV Amsterdam 100 Investment fund Parijs Kantoren Fonds BV Amsterdam 100 Real estate investment PARNIB-ABP Investments BV The Hague 67 Management of private equity investments Partalia Ltd. Jersey 100 Real estate investment Parvenor SARL Luxembourg 100 Real estate investment Platypus Investments LLC United States 100 Real estate investment Restalux BV Amsterdam 100 Real estate investment Storm ABP Holding BV Amsterdam 100 Holding company Terzo Dof Investments CV Amsterdam 100 Real estate investment Terzo Dof Investments BV Amsterdam 100 Holding company Tooronga Investments LLC Delaware 100 Real estate investment Wallaby Investments LLC Delaware 100 Real estate investment Zoolondon Investments BV Amsterdam 100 Real estate investment A full list of equity investments (including direct and indirect subsidiaries) has been filed at the Maastricht Chamber of Commerce.
    • 129 Annual Report 2008 ABP (in € million) 31-12-2008 31-12-2007 Company financial statements Company balance sheet Investments – real estate 18,167 22,090 – equities 54,339 89,960 – fixed-income investments 91,572 98,053 – derivatives 24,927 6,615 – other investments 8,564 6,716 197,569 223,434 Other assets and liabilities relating to investments – securities 29,982 31,424 – receivables, prepayments and accrued income 10,730 4,440 – cash and short-term lending 22,939 20,081 – payables, accruals and deferred income - 79,418 - 54,244 – short-term borrowing - 10,231 - 9,583 - 25,998 - 7,882 Other assets and liabilities – participating interests 577 521 – tangible assets 93 101 – receivables, prepayments and accrued income 1,016 781 – cash - 14 308 – provisions - -3 – payables, accruals and deferred income - 365 - 747 1,307 961 Fund assets 172,878 216,513 Provision for pension liabilities – retirement and surviving dependants’ pensions 189,400 150,844 – disability pensions 1,993 2,188 – flexible and early retirement pensions 1,402 1,512 – ABP ExtraPensioen 133 131 192,928 154,675 General reserve - 20,050 61,838 Company statement of income and expenses 2008 2007 Results of participating interests (after tax) - 78 68 Other income and expenses - 81,810 9,296 Total income and expenses - 81,888 9,364 Since the financial information for ABP is presented in the consolidated financial statements, the company statement of income and expenses contains just one item disclosing the results of participating interests after tax, as provided for by Section 2:402 of the Netherlands Civil Code.
    • 130 Annual Report 2008 ABP (in € million) 31-12-2008 31-12-2007 Notes to the company financial statements The accounting policies for the company financial statements are identical to those applied in preparing the consolidated financial statements. The movements in participating interests were as follows: Opening balance 521 401 Bought 797 52 Sold - 245 - Change in value - 78 68 Dividend received - -0 Other movements - 418 - Closing balance 577 521 In effecting the relinquishment of self-administered fund status, ABP sold the administrative organisation ‘at arm’s length’ to a specially established subsidiary (of a subsidiary). This subsidiary financed the transaction partly with borrowed capital obtained from ABP. The loan has been recognised in the carrying amount of the participating interests. Other movements relates to the elimination of results on transactions within the group. General reserve Companies preparing their financial statements in accordance with the provisions of Part 9, Book 2, of the Netherlands Civil Code are required to maintain a revaluation reserve equal in amount to the unrealised gains on assets for which frequently quoted market prices are not available. The revaluation reserve also prevents creditors from being disadvantaged by dividend distributions out of reserves that are not available for distribution. Banks and insurance companies are exempted from this requirement but, curiously, no such dispensation exists for pension funds. Because of their legal status (foundation), pension funds do not have shareholders and do not make dividend distributions. Given this situation, no separate revaluation reserve has been recognised. As at year-end 2008, revaluation reserves would have amounted to € 2.7 billion (2007: € 5.0 billion). Stakeholders in a pension fund are in any case adequately protected by the rules contained in the Financial Assessment Framework (FTK). Accountants’ fees Pursuant to the provisions of Part 9, section 382a, of the Netherlands Civil Code, the company financial statements must disclose details, on a consolidated basis, of the total fees charged to the entity by the external auditors and the accountancy organisation used (complying with the Act on the Supervision of Accountancy Organisations). The costs charged to the entire group by the external accountants in the Netherlands in 2008 amounted to € 1.6 million for audit services and audit related services (only focused on SAS70), € 0 million for tax consultancy and € 0.7 million for other services.
    • Other information
    • 132 Annual Report 2008 ABP Provisions of the Articles concerning profit appropriation Although the Articles do not contain any provisions concerning the way in which the result should be appropriated, the entire amount of each year’s result is added or charged to the general reserve. The annual report was adopted by the Board of Governors of Stichting Pensioenfonds ABP in the meeting held on 29 April 2009 on the basis of the recommendations of the Participants’ and Employers’ Councils and other considerations.
    • 133 Annual Report 2008 ABP Actuarial statement Assignment Stichting Pensioenfonds ABP in Heerlen instructed Watson Wyatt B.V. to provide an actuarial statement as referred to in the Pension Act for the 2008 financial year. Data The data on which my audit is based have been provided by and prepared under the responsibility of the management board of the pension fund. My assessment of the fund’s assets and financial position is based on the financial data that form the basis of the annual accounts. In accordance with the guideline “Cooperation between auditors and actuaries regarding the audit of the accounts of insurance institutions”, the pension fund’s auditor informed me regarding the reliability and completeness of the necessary basic data and the other assumptions that are of importance in forming my opinion. Scope In carrying out the assignment, I investigated whether the provisions of Articles 126 to 140 of the Pension Act have been satisfied. The administrative base data provided by the pension fund and the findings of the auditor regarding this administrative base data, are such that these data have been accepted by me as the starting point for my audit. As part of the proceedings in carrying out the assignment: – I investigated, among other things, whether the technical provisions, the minimum regulatory own funds and the regulatory own funds are determined sufficiently, and – I formed an opinion regarding the financial position of the pension fund. I performed my audit in such a way that a reasonable degree of certainty has been obtained that the results do not contain any material inaccuracies. I formed an opinion about the degree of certainty that the pension fund will be able to meet its liabilities accumulated to the balance sheet date. The activities described above and the method with which these were carried out are in accordance with the standards and practices accepted by the Dutch Actuarial Association, and in my opinion form a well-founded, reliable basis for my opinion. Opinion Having due regard to the following, I believe that the provisions of Articles 126 to 140, with the exception of Articles 131, 132 and 133, of the Pension Act have been satisfied. The technical provisions have been calculated with sufficient accuracy in accordance with the described accounting rules and assumptions. The amount of own funds of the pension fund as of the balance sheet date is lower than the minimum regulatory level and lower than the regulatory level of own funds. Measured against the criterion prescribed by law, the pension fund has a coverage deficit. As of the balance sheet date, the volume of this coverage deficit is such that the liabilities are not fully covered by assets. The financial position of Stichting Pensioenfonds ABP is in my opinion insufficient because of a coverage deficit. The determining factor in this respect is the degree of probability that the pension fund will be able to meet its liabilities incurred up to the balance sheet date, taking into account the intended supplements as announced to those insured and the criteria specified in legislation and regulations.
    • 134 Annual Report 2008 ABP To recover, the pension fund depends to a considerable extent on future excess returns, an increase of the nominal market rate of interest and the premium margin in relation to unconditional aspects. In continuing the current policy, the degree to which supplements will be given during the period of recovery are limited. Apeldoorn, 29 April 2009 ir drs G Veluwenkamp AAG affiliated to Watson Wyatt BV
    • 135 Annual Report 2008 ABP To the Board of Governors of Stichting Pensioenfonds ABP Auditor’s report Report on the financial statements We have audited the accompanying financial statements 2008 of Stichting Pensioenfonds ABP (‘the foundation’), Heerlen as set out on pages 83 to 130 which comprise the consolidated and company balance sheet as at 31 December 2008, the consolidated and company profit and loss account for the year then ended and the notes. The Board of Governors’s responsibility The Board of Governors of the foundation are responsible for the preparation and fair presentation of the financial statements and for the preparation of the Report of the Board of Governors, both in accordance with Part 9 of Book 2 of the Netherlands Civil Code. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of the financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditor’s responsibility Our responsibility is to express an opinion on the financial statements based on our audit. We conducted our audit in accordance with Dutch law. This law requires that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and dis- closures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the foundation’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the foundation’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Board of Governors, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements give a true and fair view of the financial position of Stichting Pensioenfonds ABP as at 31 December 2008, and of its result for the year then ended in accordance with Part 9 of Book 2 of the Netherlands Civil Code.
    • 136 Annual Report 2008 ABP Report on other legal and regulatory requirements Pursuant to the legal requirement under 2:393 sub 5f of the Netherlands Civil Code, we report, to the extent of our competence, that the Report of the Board of Governors is consistent with the financial statements as required by 2:391 sub 4 of the Netherlands Civil Code. Amsterdam, 29 April 2009 PricewaterhouseCoopers Accountants NV Original has been signed by Prof dr JA van Manen RA
    • 137 Annual Report 2008 ABP Management and key representatives The names of the members of the Board of Governors as at GAA Verkerk year-end 2008, together with details of the principal offices which Principal office: Mayor of Delft they hold and any other relevant offices, as well as the names Other relevant offices: Member of the General Committee of of the members of the various Committees, the Participants’ Association of Dutch Municipal Authorities (VNG), Chairman of Council, the Employers’ Council and the Accountability Body, are the VNG Labour Affairs Board listed below. BHJJM Völkers Board of Governors Principal office: None LC Brinkman (retired 31 March 2009) Other relevant offices: Member of the Executive Board of Principal office: Chairman of Bouwend Nederland Stichting Loyalis, Member of the Council for Civil and Military Other relevant offices: Vice-Chairman of VNO-NCW, Chairman Care and Research of the Supervisory Board of APG Groep NV, Member of the Social and Economic Council, Chairman of the Supervisory K Kruithof (retired 31 March 2009) Board of RABO-Bouwfonds / Friesch-Groningse Hypotheek Principal office: Adviser to the Executive Board of Vakbond CNV Bank, Member of the Supervisory Board of Philip Morris Holland, Publieke Zaak (public sector union) Member of the Supervisory Board of DuPont Nederland, Other relevant offices: Member of the Executive Board of Chairman of the Supervisory Board of Cultuurfonds Triodos Bank, Stichting VUT-fonds Overheidspersoneel Chairman of the Supervisory Board of Zuidas Onderneming Amsterdam (in course of incorporation) CAM Michielse Principal office: Director of CMHF (Centre of Middle and Senior LJCM Le Blanc Officers in Government, Educational Enterprises and Institutions) Principal office: CFO of Urenco Ltd. Other relevant offices: Member of the Executive Board of KPN Other relevant offices: Member of the Supervisory Board of Pension Fund (representing employees), Member of the Executive Altarea SCI Board of Pension Fund Cultuur (representing employees), Member of the Pension Committee of Vakcentrale MHP, Member CW van Boetzelaer (retired 31 March 2009) of the Social and Economic Council (SER) Balanced Corporate Principal office: None Governance Committee, Alternate Member of the SER Pensions Other relevant offices: Chairman of Trust/Houdster Committee, Member of the Executive Board of Spaarfonds SCO, Maatschappijen Compass (Bata) Groep, Member of the Member of ROP representing CMHF, Member of the Executive Supervisory Board of IMC BV (up to 31 July 2008), member Board of Stichting VUT-fonds Overheids- en Onderwijspersoneel, of the Supervisory Board of Loyalis NV (up to 30 June 2008), Member of the Executive Board of CAOP Member of the Supervisory Board of APG Groep NV G van der Gaarden (retired 31 December 2008) HCJL Borghouts (Interim Chairman with effect from 1 April 2009) Principal office: Member of the Executive Board of Principal office: Queen’s Commissioner in the Province of Onderwijsbond CNV (teachers’ union) Noord-Holland Other relevant offices: Member of the Executive Board of Other relevant offices: Member of the Executive Board/Treasurer Stichting VUT-fonds Overheids- en Onderwijspersoneel of Stichting Bijzondere Leerstoel ‘De overheid als arbeidsorgani- satie’, Chairman of the Supervisory Board of Expertisecentrum AA Rolvink Forensische Psychiatrie, Member of the Advisory Council of Principal office: Member of the Executive Board/Treasurer of AOB Nederlands Genootschap van Burgemeesters Other relevant offices: Member of the Executive Board of Stichting VUT-fonds Overheids- en Onderwijspersoneel, JN van Lunteren Member of ROP, Chairman of Stichting Loyalis, Member of the Principal office: Organisation consultant for Het Expertise Supervisory Board of APG Groep NV Centrum Other relevant offices: Chairman of the Central Committee for Statistics, Member of the Supervisory Board of Dutch Infrastructure Fund BV, Member of the Audit Committee of the Dutch Ministry of Education, Culture and Science
    • 138 Annual Report 2008 ABP XJ den Uyl FJM Crone Principal office: General Secretary of ABVAKABO FNV union Principal office: Mayor of Leeuwarden Other relevant offices: Chairman of ACOP FNV, Chairman of Other relevant offices: Chief of Police of the Friesland Police the Cooperative Centres for Government Employees (SCO), Force, Chairman of the Regional Friesland Police Force Board, Chairman/Vice-Chairman of the ROP, Chairman of the Friesland Regional Emergency Services, Member of the Executive Board of CAOP, Chairman of the Security, Emergency Management and Public Member of the Executive Board of the Dutch Association of Health Executive Committee for Friesland, Member of the Industry-wide Pension Funds Security Council (National Council of Security Region Chairmen), Chairman of Stichting Herdenking Gevallenen 4 mei, Member J Witvoet of the Executive Committee of Stichting tot Onderhoud van Principal office: None de Stadhouderlijke Grafruimte in de Grote Kerk, Member of Other relevant offices: Chairman of Stichting Zorgzaam, Member the Supervisory Board of VARA, Member of the Day-To-Day of the Executive Board of Stichting VUT-fonds for Government Management Committee of the Councillor of Chiefs of Police in Employees, Member of the Executive Board of Stichting the Netherlands, Member of the Supervisory Board of Stichting Ziektekosten Verzekering Krijgsmacht (SZVK), Member of the Energy Valley Members’ Council of ACHMEA, Chairman of the ABP Appeals Committee Audit Committee Members of the Board of Governors LC Brinkman, Chairman LJCM Le Blanc GAA Verkerk BHJJM Völkers G van der Gaarden CAM Michielse AA Rolvink External members JPW Klopper Principal office: None Other relevant offices: Chairman of the Investigative Committee of KAS BANK Pension Fund, Member of the Advisory Committee of Pensioen Bestuur & Management, Member of the Supervisory Board of Graphic Holding BV, Chairman of the Internal Super- vision Committee of Stichting Pensioenfonds Unilever Nederland ‘Progress’, Member of the Investigative Committee of Stichting Pensioenfonds TDV T de Swaan (up to 20 March 2009) Principal office: None Other relevant offices: Chairman of the Supervisory Board of Van Lanschot NV, Vice Chairman of the Supervisory Board of Ahold, Member of the Supervisory Board of DSM, Non-Executive Director of GlaxoSmithKline, Non-Executive Director of Zurich Financial Services, Treasurer of Koninklijk Concertgebouworkest, Treasurer of the Supervisory Board of NKI/AvL, Chairman of the Advisory Board of RSM, Chairman of Stichting Steun VUmc MS Centrum Amsterdam
    • 139 Annual Report 2008 ABP Fund Policy Committee Participants’ Council Employers’ Council LC Brinkman, Chairman ACOP Secondary Education Council (MBO) CW van Boetzelaer SJP Bakker WGG van Dalen (Council Chairman) LJCM Le Blanc JMH Beurskens JN van Lunteren AGJ Boender Primary Education Council (PO) CAM Michielse JF Custers JAP Veringa XJ den Uyl AJM Debie PH van der Veen BHJJM Völkers M van de Grift AA Rolvink JJJ Grobbée Further Education Council (VO) JHO Grönloh LFP Niessen Investment Policy Committee JM de Jong-de Leeuw H Schutt LC Brinkman, Chairman JA van Nie CW van Boetzelaer CAM Oostvriesland-van der Zanden University Medical Centres (NFU (UMCs)) LJCM Le Blanc JHM Rutten JA Wenneker JN van Lunteren W Salverda CAM Michielse FW Sluijter Higher Education Council (HBO) J Witvoet L Vliet – XJ den Uyl A van Wamelen MN Kleefstra († 1 December 2008) Central Government Investment Committee BM Baert External members CCOOP CA van Ogtrop P Lambert, Chairman up to 31 December EWP van Boven (Council Chairman) PAJ Sieverding († 23 May 2008) 2008 GAMC Dijkers F Fröhlich, Chairman as from 1 January B Koolwijk Defence 2009 FJG Hintzen AJ van der Knaap P de Grauwe CM Kruf L de Bever FJC van der Looy Police S Evans HG de Pee K de Neef KN Kjaer MJ de Sutter-Besters Judiciary Appeals Committee AC H Springer Members of the Board of Governors PGJ Jong J Witvoet, Chairman RWE Raats (Council Vice-Chairman) Municipal Authorities K Kruithof JCH Kessen WFM Heijmans RH Roggema († 13 November 2008) J Boere External members R Barnhoorn CMHF Provincial Authorities M van Seventer JBA Kipp WH Brinkman MJF Stelling WBM Treu ESM van Zadelhoff AW Verburg Water Boards AC van Pelt M Weusthuis – Remuneration Committee NVOG representing pensioners Research Organisations (WVOI) LC Brinkman, Chairman B Koster MJ Mathot CW van Boetzelaer S van der Schoot XJ den Uyl Association of Universities (VSNU) JN van Lunteren – AA Rolvink Dutch Energy and Utilities Employers’ As- sociation (WENB) PCF vd Vlugt HP Borra NJH Sijben
    • 140 Annual Report 2008 ABP Accountability Body Administrative Office Employers’ Representatives NJM Beuken, Manager JA Wenneker M Wiesemann, Deputy Manager WGG van Dalen PH van der Veen External Actuaries JAP Veringa (Vice-Chairman) Watson Wyatt BV H Schutt BM Baert External Auditors CA van Ogtrop PricewaterhouseCoopers Accountants NV AJ van der Knaap H Springer J Boere WH Brinkman PCF van der Vlugt Active Participants’ Representatives JMH Beurskens JM de Jong-de Leeuw JA van Nie CAM Oostvriesland-van der Zanden W Salverda JHM Rutten EWP van Boven (Vice-Chairman) B Koolwijk HG de Pee WBM Treu RWE Raats JCH Kessen Pensioners’ Representatives JJJ Grobbée, (Accountability Body Chairman) FW Sluijter AGJ Boender JHO Grönloh A. van Wamelen FJG Hintzen CM Kruf JBA Kipp AW Verburg PGJ Jong S van der Schoot B Koster Employers’ Council Complaints Board GAW van Dalen LGLM Poell MGW Robbers-van der Borg MJF Stelling
    • 141 Annual Report 2008 ABP Abbreviations and definitions Collateral fund Fund holding furnished security obtained and provided (bonds or cash) Abbreviations Commodities Investments in assets such as grain and other AAOP ABP incapacity pension foodstuffs, metals and raw materials generally ABTN Actuarial and technical business report (actuariële en Compliance Specifically, acting in accordance with internal and bedrijfstechnische nota) external rules and regulations including the requirements of the ALM Asset and liability management law AKP ABP KeuzePensioen Corporate governance The proper conduct of business and AOP Incapacity/disability pension company management aimed at ensuring honest and transparent APG APG Algemene Pensioen Groep, (APG Groep NV, a wholly dealings and proper reporting of activities owned ABP subsidiary) Cross-currency swap A contract to exchange interest flows in CBS Centraal Bureau voor Statistiek – Statistics Netherlands different currencies without exchange of the principal CEM Cost-effectiveness measurement Defined benefit scheme A pension system in which the pension CSR Corporate Social Responsibility rights are expressed as a percentage of final or average pay (i.e. FP Flexible pension the amount of the pension is certain) FPU Flexible and early-retirement benefits Defined contribution scheme A pension system in which the FTK Financial Assessment Framework pension rights are based on an annual contribution which is HPT Redeployment benefits invested on behalf of the plan member at the member’s risk (i.e. LTI Long-term incentive the amount of the pension is uncertain) NP Surviving dependants’ benefit Derivatives Financial instruments based on an underlying OP Retirement benefit instrument and used in the management of balance sheet and SLA Service level agreement investment risks and to achieve the strategic asset mix StAr Labour Foundation Deterministic A forecast based on a particular expected future UPO Uniform pension overview scenario for interest rates or rates of return VUT Voluntary Early-Retirement Scheme Duration The weighted average maturity of an investment, taking WGA Return to Work (Partially Disabled) Regulation account of the timing of cash flows generated by the investment Wet BPF Occupational Pension Scheme (Obligatory Participation) and from its repayment Act Equities and alternative investments (excluding hedge funds) The asset categories of equities, private equity, commodities and Definitions real estate ABP KeuzePensioen The ABP pension product offering the Exposure The market value at risk of an asset or, in the case of flexibility of converting the basic retirement pension into a partner derivatives, the value of the underlier pension and of taking a part-time pension Fixed-income investments Investments with a fixed maturity Absolute return strategies See hedge funds and an agreed interest and repayment schedule, such as private Active risk The risk due to the difference in the asset mix placements, bonds and mortgage loans between a managed portfolio and a benchmark Former participants Members of a pension fund who are no Administrative organisation The in-house pension administration longer building up pension rights in the fund activities of ABP (prior to relinquishment of self-administered Forward currency contract A contract to buy or sell a given status) amount of a currency at a agreed exchange rate on an agreed Asset Any investment future date. The agreed forward rate is based on the spot rate at Asset-backed securities (ABS) Marketable financial instruments the time of entering into the contract plus a markup reflecting the backed by assets (debt), other than real estate and mortgage- interest rate differential between the two currencies concerned backed securities FPU transitional rights When the FPU scheme was discontinued Asset and liability management Modelling of asset and liability for new members at the end of 2005, the essentials of the movements to assist in the evaluation of policy on contributions, scheme continued to apply for existing participants born before indexation and investment 1950 and with uninterrupted membership of ABP since 1 April Basis point 0.01 of a percentage point 1997 by way of transitional rights to the new scheme, although Benchmark Standard against which the costs and performance the participants concerned in fact have to continue working a few of institutions in the same sector are compared months longer in order to attain the same level of benefit Cash collateral Security received in the form of cash Funding ratio The extent to which defined benefit obligations are Coinciding service Years of service built up over the same period covered by the existing capital by participant and partner Future A contract that can be traded on an exchange under
    • 142 Annual Report 2008 ABP which there is an obligation to deliver the underlying value at a Repo Short for a ‘repurchase operation’, involving a repurchase future date for an agreed price agreement, i.e. a contract to sell securities and buy them back Hedge funds An investment fund which, by pursuing a at a specified time and price. In effect, it is a way of borrowing or predetermined strategy, seeks to achieve a positive return lending stock for cash, with the stock serving as collateral irrespective of the market return. Hedge funds are often closed- Securities lending The lending of securities for a consideration, end funds operating with borrowed capital and employing beneficial ownership being retained by the lender derivatives. Alternatively referred to as absolute return strategies Short position A position in which an obligation to deliver High-yield A description of an investment that generates a high securities at a future date is assumed without actually possessing level of returns but has a commensurately high risk profile them when the obligation is assumed, the counterparty’s risk Indexation In the case of pensions, adjustment of the promised being mitigated by furnishing collateral benefits in line with the general rate of wage inflation year on year. Spread The difference in return between two assets For ABP, indexation is not automatic but strictly conditional Stochastic Description of an analysis method using a large Index-linked bonds Bonds on which the coupon is adjusted for number of possible future scenarios, showing both the likely inflation outcome and the range of possible outcomes Inflation The reduction in the amount that money will buy Swap A derivative instrument involving the exchange of cash Initial margin The margin lodged when opening a futures position flows or risks Intraday facility Short-term funding instruments settled within one Swaption An option on a swap contract, used, for example, in day controlling the duration Investment grade Description of the quality of, for example, Tracking error The difference in return between a portfolio and its a bond, the credit rating being an important indicator. Any benchmark investment with a rating better than BBB is relatively secure and Z score A measure of the difference between the actual return pension funds are often prohibited from investing in lower-grade and the return on the predefined norm portfolio, net of expenses instruments Mandatory reserve A minimum reserve that is not available for distribution Minimum funding ratio The funding ratio at which the obligations are just to say funded, i.e. the fund is not in deficit Mortgage-backed securities (MBS) Marketable financial instruments issued by mortgage lenders and backed by mortgage loans Nominal When referring to an amount of money or a percentage, the face value, without allowing for future wage or price inflation Norm portfolio A predetermined investment portfolio mix, with related benchmarks, against which the actual investment return is compared Option (traded option) A right to buy or sell a given quantity of an underlying asset etc. on an options exchange at a predetermined price at any time within a certain period Pension administrator The pension administration activities of the company contracted by ABP to perform the pension administration, viz. APG (following relinquishment of self- administered status) Private equity Investment in the risk-bearing capital of unlisted companies Provision for insurance liabilities The present value of all expected future insurance liabilities under existing policies. Also referred to as a technical provision Provision for pension liabilities The present value of all expected future benefit payments to which active participants and former participants as well as pensioners are entitled. Also referred to as a technical provision Real estate fund An investment fund investing in real estate
    • Statistical information on participants
    • 144 Annual Report 2008 ABP 1. Age profiles of active Dutch labour force and ABP active participants (percentages), year-end 2008 11.5% 22.6% 27.5% 25.0% 13.4% Active Dutch labour force* - men 4.7% 15.7% 21.8% 33.7% 24.2% ABP-active participants - men 12.5% 25.0% 27.9% 24.6% 10.0% Active Dutch labour force* - women 5.3% 24.1% 27.3% 29.4% 13.9% ABP-active participants - women 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 15 - <25 yr 25 - <35 yr 35 - <45 yr 45 - <55 yr 55 - <65 yr ABP’s active participants are clearly an ageing population. The percentage in the youngest age group is less than half that for the Dutch working population as a whole. There is also a difference in the next two age groups, but not as pronounced and even less so for women. At the other end of the age range, the two oldest age groups are relatively strongly represented among the ABP population compared with the Dutch working population as a whole and, once again, the difference is greatest among men. *) The figures for the Dutch working population were provided by CBS Statline.
    • 145 Annual Report 2008 ABP 2. Age profile of active participants, year-end 2008 – individuals 65+ 60 55 50 45 40 35 30 25 20 women age men 15 25,000 20,000 15,000 10,000 5,000 0 5,000 10,000 15,000 20,000 25,000 number of individuals 3. Trend in numbers of active participants, analysed by age group and gender 2008 2007 2006 2005 2004 age group men women men women men women men women men women 15-<25 26,125 28,561 26,181 27,389 25,159 25,836 24,758 25,789 24,872 27,013 25-<35 87,969 130,188 88,216 128,160 88,671 126,548 90,395 125,622 92,362 125,400 35-<45 122,476 148,211 127,707 148,965 133,173 148,443 139,622 148,766 146,239 148,935 45-<55 191,425 160,592 197,000 156,994 201,984 152,773 205,214 148,243 207,949 143,005 >=55 158,473 78,891 149,212 71,662 138,694 64,559 134,293 59,576 138,615 58,240 total 586,468 546,443 588,316 533,170 587,681 518,159 594,282 507,996 610,037 502,593 The ratio of men to women has shifted in recent years, with the number of men falling 4.0% and the number of women rising 8.0%. As at year-end 2008, 51.8% of active participants were men, compared with 54.8% as at year-end 2004. An increase in the average age is observable for both men and women in the two highest age groups, where the proportion has risen from 56.8% to 59.7% for men and from 40.0% to 43.8% for women.
    • 146 Annual Report 2008 ABP 4. Age profile of active participants, year-end 2008 – FTEs 65+ 60 55 50 45 40 35 30 25 20 women age men 15 25,000 20,000 15,000 10,000 5,000 0 5,000 10,000 15,000 20,000 25,000 FTES 5. Trend in active participants analysed by age and gender – FTEs 2008 2007 2006 2005 2004 age group men women men women men women men women men women 15-<25 23,379 22,748 23,535 22,026 22,746 20,489 22,130 20,191 22,609 22,367 25-<35 84,813 109,660 85,212 107,981 85,038 105,840 85,562 103,576 88,031 104,038 35-<45 118,554 109,025 123,815 109,124 128,577 107,368 133,429 105,128 140,264 105,200 45-<55 185,538 120,473 191,211 117,388 195,268 113,053 195,801 107,264 198,731 103,788 >=55 148,722 58,845 139,689 53,169 126,516 47,349 123,833 41,893 123,149 39,296 total 561,006 420,750 563,462 409,688 558,145 394,100 560,755 378,052 572,785 374,689 The average number of full-time equivalents is obtained by dividing the number of FTEs by the number of individuals. The figure is 0.96 (2008) for men, 0.77 for women and 0.87 for the total population. These average FTE figures remain fairly constant over the years.
    • 147 Annual Report 2008 ABP 6. Distribution of active participants by full-time annual income, divided into quartiles, year-end 2008 90,000 women 80,000 men 70,000 60,000 50,000 40,000 30,000 Number of individuals 20,000 10,000 0 18,000 22,000 26,000 30,000 34,000 38,000 42,000 46,000 50,000 54,000 58,000 62,000 66,000 70,000 74,000 78,000 Full-time annual income The peaks in the distribution are caused by concentrations of individuals in certain salary bands. This is particularly noticeable among women. The chart analyses the population by gender and shows the quartiles separately for men and women (solid lines). The boundary between the second and third quartiles, the median, divides the population into two groups of equal size (dashed lines). The median for men is close to the third- quartile boundary for women. 7. Average length of service and numbers of individuals, year-end 2008 average length of service number of individuals age group men women total men women total 15-<20 0.89 0.61 0.81 3,632 1,536 5,168 20-<25 2.32 1.43 1.83 22,493 27,025 49,518 25-<30 4.01 3.60 3.76 40,637 62,494 103,131 30-<35 6.62 6.13 6.33 47,332 67,694 115,026 35-<40 9.69 8.07 8.78 55,716 71,711 127,427 40-<45 14.05 10.37 12.09 66,760 76,500 143,260 45-<50 19.99 13.22 16.70 88,618 83,537 172,155 50-<55 25.24 15.50 21.07 102,807 77,055 179,862 55-<60 29.95 17.18 25.42 101,829 55,865 157,694 >=60 32.71 18.57 28.62 56,644 23,026 79,670 total 19.23 10.50 15.02 586,468 546,443 1,132,911 As the table shows, the number of years of service accrued by women is considerably less than the figure for men. The difference is accounted for by part-time working – which is more prevalent among women – and by career interruptions in connection with family commitments.
    • 148 Annual Report 2008 ABP 8. Percentage distribution of benefit recipients by benefit band and type of benefit Retirement benefit 2008 2007 2006 2005 2004 men women men women men women men women men women number of individuals 265,611 131,650 256,469 124,941 249,152 119,311 242,792 114,564 237,182 109,746 benefit <5 22.8% 56.8% 24.3% 58.2% 25.4% 59.1% 26.0% 59.4% 26.6% 59.5% band 5-<10 20.1% 18.5% 21.1% 18.5% 21.9% 18.6% 22.3% 18.4% 22.6% 18.4% (x € 1.000) 10-<20 28.2% 18.4% 28.7% 17.9% 28.9% 17.4% 28.6% 17.4% 28.5% 17.3% 20-<30 17.5% 5.0% 16.4% 4.4% 15.4% 3.9% 14.9% 3.9% 14.3% 3.8% 30-<40 7.2% 1.0% 6.3% 0.9% 5.6% 0.8% 5.4% 0.8% 5.2% 0.8% >=40 4.1% 0.3% 3.3% 0.2% 2.9% 0.2% 2.8% 0.2% 2.8% 0.2% The benefit on which the benefit band classification is based is the supplementary pension (second pension) only and does not include state old-age pension (AOW). Surviving dependants/orphans’ benefit 2008 2007 2006 2005 2004 men women men women men women men women men women number of individuals 21,242 178,167 20,228 177,571 19,566 176,588 18,678 176,074 17,907 175,315 benefit <2.5 51.3% 20.9% 53.3% 22.0% 55.1% 22.9% 55.5% 23.2% 56.0% 23.6% band 2.5-<5 22.0% 21.4% 21.9% 22.1% 21.5% 23.0% 21.6% 23.2% 21.7% 23.4% (x € 1.000) 5-<10 14.9% 25.3% 14.3% 25.5% 13.8% 25.3% 13.8% 25.3% 13.8% 25.3% 10-<15 6.4% 14.9% 6.0% 14.4% 5.6% 14.0% 5.4% 13.8% 5.0% 13.6% 15-<20 3.1% 8.0% 2.7% 7.8% 2.5% 7.5% 2.3% 7.4% 2.3% 7.2% >=20 2.2% 9.5% 1.8% 8.1% 1.5% 7.3% 1.4% 7.1% 1.3% 6.9% The high proportion in the lower benefit bands produces a distribution which is different from that for retirement benefit. Disability benefit 2008 2007 2006 2005 2004 men women men women men women men women men women number of individuals 31,830 38,521 34,251 40,223 36,301 41,596 38,476 43,369 40,302 44,597 benefit <2.5 32.4% 53.3% 36.9% 58.3% 41.7% 62.7% 39.6% 61.0% 40.7% 61.4% band 2.5-<5 24.0% 23.8% 24.3% 23.6% 22.2% 21.3% 23.3% 22.5% 23.3% 22.4% (x € 1.000) 5-<7.5 14.3% 11.8% 13.5% 10.0% 12.6% 8.8% 13.0% 9.1% 12.7% 9.0% 7.5-<10 8.9% 5.3% 7.9% 3.9% 7.5% 3.4% 7.5% 3.5% 7.4% 3.4% 10-<20 16.5% 5.1% 14.3% 3.8% 13.3% 3.4% 13.7% 3.5% 13.1% 3.3% >=20 3.9% 0.6% 3.0% 0.5% 2.8% 0.4% 2.8% 0.4% 2.7% 0.4% The high proportion in the lower benefit bands is even more pronounced in the case of disability pension. Again, this is partly due to the supplementary nature of the benefit, the purpose of which is to top up the state disability benefit (WAO/WIA). As from 2007 these figures also include, in addition to recipients of IP/HPT benefit (disability pension), also recipients of ABP disability pension (AAOP) and occupational disability pension (AOP) (1,668 individuals as at year-end 2008).
    • 149 Annual Report 2008 ABP Flexible/early retirement benefit 2008 2007 2006 2005 2004 men women men women men women men women men women number of individuals 59,323 23,381 64,099 24,535 67,572 25,252 67,924 25,032 52,746 19,128 benefit <5 4.5% 14.4% 4.6% 16.0% 4.6% 16.8% 4.2% 17.3% 3.5% 17.5% band 5-<10 10.6% 20.7% 11.4% 21.5% 11.7% 21.8% 11.1% 22.2% 9.5% 23.4% (x € 1.000) 10-<20 17.5% 27.2% 16.8% 27.3% 16.1% 27.8% 16.5% 28.9% 16.7% 29.9% 20-<30 19.4% 17.4% 21.7% 17.5% 23.6% 18.1% 25.7% 17.9% 28.2% 16.6% 30-<40 19.2% 11.6% 19.6% 10.8% 19.5% 9.6% 19.5% 8.6% 20.8% 8.6% >=40 28.8% 8.7% 26.0% 6.8% 24.5% 6.0% 23.0% 5.1% 21.3% 4.0% The flexible/early retirement benefit is different from the other benefits because it is in the nature of income replacement.
    • 150 Annual Report 2008 ABP 9. Age profile of disability benefit recipients, year-end 2008 60 55 50 45 40 35 30 women 25 men age 4,000 3,000 2,000 1,000 0 1,000 2,000 3,000 4,000 number of individuals Recipients of disability benefit are mainly in the older age groups. There is a preponderance of women in the younger age groups, but from age 55 onwards, the men are in the majority. This population is expected to decline sharply in the years ahead, given the more stringent requirements to be met by new claimants. 10. Trend in numbers of disability benefit recipients, by age group and gender 2008 2007 2006 2005 2004 age group men women men women men women men women men women 15-<25 0 4 2 7 2 8 2 20 1 26 25-<35 97 485 114 619 141 758 176 962 222 1,195 35-<45 1,141 3,982 1,341 4,466 1,571 4,977 1,899 5,723 2,137 6,300 45-<55 7,198 12,308 8,215 12,964 9,095 13,561 10,165 14,263 11,262 14,694 >=55 23,394 21,742 24,579 22,167 25,492 22,292 26,234 22,401 26,680 22,382 total 31,830 38,521 34,251 40,223 36,301 41,596 38,476 43,369 40,302 44,597
    • 151 Annual Report 2008 ABP 11. Average retirement age of early retirement benefit recipients 62.0 61.9 61.5 61.4 61.0 60.6 60.5 60.5 60.4 60.4 60.3 60.3 60.3 60.2 60.4 60.3 60.3 60.0 60.2 59.8 60.0 60.0 59.6 59.8 59.8 59.5 59.0 59.3 59.0 58.7 58.5 age in years 58.0 57.5 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 benefit payment starting year Prior to 1997, early retirement was only possible under the old VUT scheme. The scheme was replaced with effect from 1 April 1997 by the FPU scheme, as a consequence of which the average age of early retirement has risen in the years since 1997. In 1988 and 1989, steps to encourage part retirement in the education sector (DOP scheme) had the effect of reducing the average benefit payment starting age. In the FPU era, 2004 and 2005 stand out because of a drop in the retirement age, mainly due to schemes introduced by many employers to shed older employees, in anticipation of government policy to encourage people to work longer. The effects of the changes in the rules are clearly reflected in the rise in the average retirement age since 2005.
    • 152 Annual Report 2008 ABP 12. Trend in number of FP early retirement benefit recipients, analysed by age and gender age at 2008 2007 2006 2005 2004 year-end men women men women men women men women men women 55 0 0 0 0 0 0 1,640 655 654 296 56 0 0 0 0 1,793 712 2,245 899 1,207 543 57 0 0 1,785 710 2,916 1,205 3,149 1,261 2,502 988 58 1,777 707 3,111 1,389 3,981 1,595 5,430 1,990 3,521 1,495 59 3,405 1,629 4,231 1,831 6,323 2,403 7,078 2,778 2,909 1,262 60 5,667 2,266 7,813 2,771 9,287 3,264 6,263 2,270 4,887 1,702 61 8,964 3,454 11,494 4,367 8,432 3,170 9,803 3,546 8,191 2,891 62 14,469 5,719 10,461 3,996 11,524 4,250 11,326 4,175 9,573 3,375 63 11,484 4,468 12,274 4,592 11,945 4,478 10,584 3,868 9,536 3,267 64 12,448 4,709 11,977 4,542 10,628 3,899 9,608 3,340 9,143 3,085 65 1,109 429 953 337 743 276 798 250 623 224 total 59,323 23,381 64,099 24,535 67,572 25,252 67,924 25,032 52,746 19,128 Retirement benefit becomes payable as from the first of the month following the 65th birthday. This explains the small group of flexible/early retirement benefit recipients aged 65.
    • 153 Annual Report 2008 ABP 13. Age profile of retirement benefit recipients, year-end 2008 105 women men 100 95 90 85 individuals 80 75 70 age 65 10,000 5,000 0 5,000 10,000 15,000 20.000 number of individuals The population of retirement benefit recipients is made up largely of men, who outnumber the women by more than two to one. In the older age groups, however, the proportion of women increases, reflecting the longer life expectancy of women. 14. Trend in numbers of retirement benefit recipients, analysed by age group and gender 2008 2007 2006 2005 2004 age group men women men women men women men women men women 65-<70 87,255 44,667 82,076 41,796 77,999 39,225 75,177 37,595 72,190 35,611 70-<75 64,907 32,371 63,243 30,783 62,471 29,892 61,743 29,001 61,849 28,256 75-<80 51,937 24,891 52,149 23,915 52,474 22,981 52,918 21,876 53,317 20,753 80-<85 38,267 16,297 36,839 15,649 34,948 14,867 32,884 14,322 31,047 13,781 85-<90 17,159 8,875 16,493 8,303 16,002 8,036 15,170 7,643 14,188 7,239 90-<95 5,225 3,481 4,890 3,489 4,533 3,353 4,253 3,228 4,011 3,243 95-<100 806 949 733 914 685 877 605 817 534 780 >=100 55 119 46 92 40 80 42 82 46 83 total 265,611 131,650 256,469 124,941 249,152 119,311 242,792 114,564 237,182 109,746
    • 154 Annual Report 2008 ABP 15. Distribution of retirement benefit recipients by benefit amount, divided into quartiles 35,000 women 30,000 men 25,000 20,000 15,000 10,000 number of individuals 5,000 0 0 3,000 6,000 9,000 12,000 15,000 18,000 21,000 24,000 27,000 30,000 33,000 36,000 39,000 42,000 45,000 benefit amount The benefit distribution curve is different from the income curve for the active participants because the benefit is a second-pillar benefit which supplements the state old-age pension (AOW). The skew in the distribution makes the quartiles increasingly wide (solid lines). The median (second quartile boundary) is around € 12,300 for men and € 3,900 (dashed line) for women. The median for the total population is € 8,900 per year. 16. Trend in numbers of recipients of surviving dependants/orphans’ benefits, analysed by age group and gender 2008 2007 2006 2005 2004 age group men women men women men women men women men women 0-<10 503 546 516 558 559 572 602 562 614 578 10-<20 4,009 3,676 4,037 3,734 4,153 3,851 4,108 3,873 4,158 3,875 20-<30 865 859 818 794 826 806 809 785 808 814 30-<40 162 455 169 480 171 497 171 536 173 590 40-<50 1,039 3,352 1,104 3,607 1,160 3,836 1,177 4,030 1,221 4,258 50-<60 3,679 13,678 3,533 13,979 3,452 14,430 3,346 14,885 3,088 14,805 60-<70 4,524 29,807 4,121 29,185 3,700 28,571 3,260 27,828 3,109 27,888 70-<80 3,902 52,426 3,613 53,745 3,448 54,605 3,262 55,697 3,022 56,487 80-<90 2,245 59,641 2,039 58,326 1,840 57,017 1,706 55,933 1,508 54,622 90-<100 310 13,461 274 12,900 251 12,171 232 11,729 205 11,177 >=100 4 266 4 263 6 232 5 216 1 221 totaal 21,242 178,167 20,228 177,571 19,566 176,588 18,678 176,074 17,907 175,315 Higher life expectancy is reflected in the increase in the numbers of individuals in the higher age groups.
    • 155 Annual Report 2008 ABP 17. Age profile of surviving dependants/orphans’ benefit recipients, year-end 2008 110 105 100 95 90 85 80 75 70 65 60 55 50 45 40 35 30 25 20 15 10 women 5 age men 0 8,000 6,000 4,000 2,000 0 2,000 number of individuals Of the individuals in receipt of surviving dependants’ benefit, 90% are women. This is partly because, in the older generations, the breadwinner was usually the man but also because widowers’ pensions were only introduced in 1989. Because women also live longer than men on average, few men are in receipt of surviving dependants’ benefit. The gender balance among recipients of orphans’ benefit is more or less equal. The fact that orphans’ benefit ceases to be payable at the end of the month in which the recipient attains the age of 21 explains the small number of orphans’ benefit recipients aged 21.
    • Published by ABP PO Box 4874, 6401 JP Heerlen, Netherlands Oude Lindestraat 70, 6411 EJ Heerlen, Netherlands Telephon +31 45 579 29 11 Fax +31 45 579 21 94 E-mail communicatie@abp.nl Image editing, photo research and historical image captions LaVerbe, Nijmegen Photography AFP Photo/Deshakalyan Chowdhury ANP Photo/Olaf Kraak ANP Photo/Robin Utrecht Bettmann/CORBIS Collectie Spaarnestad Photo EPA/Shawn Thew © International Olympic Committee/1896/Marx Michael Maslan Historic Photographs/Corbis Museum of History and Industry/Corbis Ton van Vliet/Hollandse Hoogte Translation Mac Bay, Amsterdam Printing and binding Roto Smeets GrafiServices Eindhoven Heerlen, 2009 ABP 01.0002.09A SCS-COC-00812