The shocking events in Ukraine make 2021 seem long ago. Yet this was again a year of extremes. With great uncertainty about the development of the pandemic on the one side and rising stock prices on the other. Interview with board member Janneke Abels and chairman Martin ten Brink.
Martin: "I would hate for us to start our conversation without mentioning the war in Ukraine. Although I realise that it has no bearing on the developments of SSPF in 2021, the consequences are enormous. What is happening in this country is beyond description: shocking and terrifying at the same time."
Janneke: "Therefore it is a good thing that we are going to divest from all SSPF's Russian investments and not consider any new ones. That is the least we can do. To send a clear signal that we reject this Russian aggression."
Martin: "Agreed, and my apologies for bouncing the question back to you: how would you describe 2021?"
Janneke: "Actually, 2021 was a very strange year. We had to deal with lockdowns, again, and there was a lot of unrest. The continuous stress of whether healthcare workers would survive, the setbacks suffered by many companies... at first it seemed that this uncertainty was difficult to match with the enormous price increases on most stock markets."
Martin ten Brink: "With a return of 9,6% and a funding ratio that has risen to 130,6%, we look back on an excellent year for our pension fund"
Martin: "Agreed. Despite all the unrest, 2021 was a successful year for many investors. This certainly holds true for SSPF. With a return of 9,6% and a solid funding ratio which increased to 130,6%, we look back on what was an excellent year for our pension fund. All the more so because we can now offer a substantial indexation: not only 5.0 per cent over 2022, but also a catch-up indexation of 0.7 per cent over 2021. This means that our pension beneficiariesand inactive participants are once again 'up to speed' when it comes to compensation for price increases."
Janneke: "Which is pretty unique in the Dutch pension world. For SSPF, completing the ALM study was one of the most important milestones of this year. We analysed our liabilities, compared them to possible future investment returns and then examined our strategic goals. This resulted in extensive and fruitful discussions within our board. What do we want from a strategic perspective? What goals do we pursue and what do we believe are acceptable risks?"
Martin: "An important outcome of this study is that we think it's wise from now on to not primarily focus on the usual nominal funding ratio, but rather the actual funding ratio. That way possible inflation in the future is also taken into consideration. That supports our efforts to offer our pension beneficiaries and inactive participants a value guaranteed pension at all times. And we considerably raise the bar for ourselves."
Janneke: "The advantage of this is that the actual funding ratio is a better indicator. While our nominal funding ratio rose to 13% in 2021, the actual funding ratio fell slightly, to 85%. Actually, this was to be expected, as inflation rose sharply at the end of the year but interest rates, on balance, only rose slightly."
Martin: "Yes indeed, you then see those two, nominal and actual funding ratios, diverge. But if next year interest rates were to rise further with inflation falling, the nominal and actual funding ratios would converge. What matters most to us is the returns we need to achieve at present in order to generate sufficient cash flows in the future, including the sought-after inflation compensation. Together with our external ALM advisor Ortec and colleagues at Shell Pensioenbureau Nederland (SPN), we had a huge number of scenarios calculated using computer-guided 'Monte Carlo simulations'. For each possible scenario, these simulations indicate the ideal investment mix, i.e. the distribution between shares, bonds and real estate, as well as the required interest rate hedge. This gives you a whole cluster of possible results, each with a certain degree of probability. We do keep a long-term focus here; it is not about investment results over a single calendar year, but over a period of, say, five to ten years."
Janneke: "By investing based on our actual funding ratio, we can protect the realised returns even better than we already did earlier. We create more room for our portfolios to move in line with inflation and interest rates. This is done in close cooperation with both our asset managers SAMCo and SPN, our pension office, who also suggest future options."
Martin: "Talking about our pension office (SPN), I think it's remarkable how professionally they have operated this year again, with full schedules in combination with the limitations of working from home. For me personally, the individual walking meetings with SPN colleagues are very worthwhile, they work really well: you're out in the fresh air and by walking together you can have effective and sometimes in-depth discussions, is my personal experience. This year we have taken additional steps in the area of communication with participants, such as video calls, emails addressing current affairs and entertaining and short videos with hands-on information, etc. This has also improved the perception of participants on the topic of pensions, one of our strategic goals. Which is necessary, as many participants only start thinking about their pension when retirement is nearly upon them."
Janneke Abels: "We are going to protect our returns even better than we already did"
Martin: "How do you feel about the Pension Agreement?"
Janneke: "Within the board we have also discussed our approach to socially responsible investing, better known as ESG. The standards set by laws and regulations are getting increasingly stricter, and rightly so. We know from our own research that our participants also consider ESG to be a very important issue. We have had some serious discussions about this amongst ourselves: which shares or countries do you invest in, and in which ones you don't? What are the pros and cons of excluding specific investments? We also talk about this with EOS at Federated Hermes, a specialised agency that establishes a dialogue on behalf of SSPF with companies we invest in. In any case, ESG guidelines are becoming stricter and we obviously want to continue to be in compliance with these guidelines."
Martin: "Yes, it will be interesting to see which future pension scheme Shell Nederland and the Central Works Council (COR) will choose, that's not up to us. And will they decide to convert existing rights over to the new system, or won't they? For future pension accrual, the draft legislation as it is at present is clear. From now on, we will accrue pension through the 'available premium scheme'; Pension benefits will then depend on the achieved investment returns. The defined benefit, as is currently the case, will be abolished in the future. Everyone pays the same pension contribution, regardless of age, but for already accrued pension rights, draft legislation allows for these to remain unchanged also in the future. In any case, we are preparing ourselves for various scenarios and are asking Shell and the COR how feasible and easy to explain and balanced each scenario is. This will eventually become clear once talks between Shell and the COR have been concluded."
Janneke: "What do you believe are the most important topics for the board in 2022?"
Martin: "In 2022, we will further develop our Journey Management Plan, which sets out a range of possible investment scenarios; refine our ESG story; and last but not least, continue to focus on improving our actual funding ratio."
For Martin ten Brink, 2021 was the first full year of his chairmanship of SSPF. Before that, he worked around the world for Shell in a variety of financial positions for over thirty years. Shortly after his retirement, in May 2020, he became chairman of the SSPF board. His guiding principle in times like this: focus on what is feasible, don't linger too long on what is not.
Over twenty years ago, Janneke Abels started her career at Shell as a financial analyst, after which she was financially responsible, among others, for a fuel division in the US. Currently she is Vice President Finance Sectors and Decarbonisation. On behalf of her employer Shell, Janneke has been on the SSPF board for over four years. One of the issues that is close to her heart is how, as a pension fund, you can optimally integrate ESG in your investment policy.