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“Two things we did on the investment side made a difference. The most important was the new decision-making process for the board of trustees. We don’t present possible asset allocations and ask them to choose, but we present sets of consequences for a wide scope of possible investment and asset allocations and we ask them which set fits best with the preferences they have. For each of the policies shown, we do not mention the underlying investment activity. We set out criteria that are of importance to the pension fund, including the risk of underfunding and the potential for indexation, but also the sponsor—how much pension contributions would be and the risk of remedial contributions.
Then we lay out the policies and show the results of each of them for every one of the criteria. For example, Policy One could have a possibility of indexation of 70% and a possibility of underfunding of 2%, and Policy Two might have a possibility of indexation of 90% and a possibility of underfunding of 10%. We make sure that for all stakeholders we have criteria that both represent the pluses and risks. By doing this, the board is really focused on the trade-off between the interests of the different stakeholders and the way they think is correct.
We started this at the end of 2007. It separates the discussion between assumptions on outlooks for different investment categories from the discussion around to what extent should they serve which interest. It ensures that when trustees have different levels of knowledge on investing, the focus is on the consequences so they are on equal footing during the discussion.
Also, if there are prejudices, they can’t include them in the discussion as they don’t know what the underlying assets are. The trustees can always change their minds. So far they haven’t, but revelation of the chosen investment policy sparked discussion twice. The first was in 2007: We presented some traditional, static policies with a stable asset mix along with dynamic policies where the asset mix would automatically change as a function of the funded ratio during the year. They didn’t know that there were these different types of strategy behind the sets of outcomes and they chose one. They asked: ‘Wow, is this dynamic policy the usual thing?’ I said there were not too many pension funds using that type of strategy, but it apparently gives the best risk/return profile. They had the investment advisory committee make another in-depth comparison between this and a traditional strategy, which would be the closest to it. After this, they said that they had no reason not to take the dynamic strategy and stuck to their first choice.
In 2008, we had a very bad year of course; but we lost more than 10% of the coverage ratio less than we would have done if we had had a traditional portfolio in place.
Each year, the process takes three to four months. After the board has decided what the assumptions should be, we put together 40 to 50 strategies. Then we make a subset of approximately 20 strategies. Those 20 are presented to the investment advisory committee and we explain each underlying investment policy. We ask whether they think the strategies are fair and realistic and if we could implement them if they were chosen. Secondly, we ask if they span the whole scope of policies from which the board may want to choose. They then reduce the set to approximately 10, which are presented to the board.
If circumstances change, many investors react by making tactical decisions—we don’t. We don’t believe that we would be able to improve the results of the asset allocation structure by tactical asset allocation. In crisis situations we review both our market and operational risks, and if they would be increased to the extent the board finds unacceptable, we would take measures to reduce them, but that would be the only time we would change. We don’t make any tactical decisions based on market outlooks.”