Summary Annual Report PME

2 0 Summary Annual Report PME 1 3 Foreword Our participants and pension beneficiaries are reluctant to take too much risk. That became clear fro...
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Summary Annual Report PME

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Foreword Our participants and pension beneficiaries are reluctant to take too much risk. That became clear from a risk acceptance survey conducted for PME in the past year, as well as in many talks between participants and Fund representatives over the same period. That aversion to risk is perhaps not so surprising. In 2013 PME had to reduce pensions by a painfully large margin. And in 2014, despite our utmost exertions, PME has been unable to avoid a further modest reduction. In these circumstances participants understandably opt for security.

Prudent But that security comes at a price. Lower risk exposure means lower returns in the long term. Pensions are largely paid out of our returns on investment. A lower return thus has an impact on the end result. A relatively cautious investment policy by comparison with many other pension funds, such as PME has observed for several years, protects the Fund in economically adverse times. That has delivered good results in the past five years. But there’s another side to the coin. In 2013 PME achieved a positive but marginal return that reflected our reduced potential, on grounds of our prudent investment policy, to gain from the strong recovery in equities markets. But the governing board remains convinced that this policy was the right course to take in recent years, not just because it reflects the preferences of Fund participants but also because our financial position is still insufficiently sound. PME’s prudent investment policy is thus a deliberate choice.

Lower pensions Our participants want to be well looked after in their old age. A cut in pension levels is at odds with that aspiration. The PME governing board is more keenly aware of that than most. That is why we made the utmost effort to avoid another pension cut in 2014 after the intervention in April 2013. At the due date our financial position was sadly still marginally in shortfall, making a second pension cut unavoidable. And while the material impact of that 0.5% reduction is limited, it nevertheless comes on top of last year’s cutback.

Close to the wind The Fund’s relatively prudent investment policy generated a marginally positive 1.0% return in 2013. Alongside the impact of lower interest and higher life expectancy rates, that is one reason why the Fund failed to put the enough fat on its bones before the target date stipulated in our recovery plan. But the Fund’s still deficient financial position stems from an earlier date than the global financial crisis. When the crisis arose PME already had a slightly lower funding ratio than many other leading pension funds in the Netherlands. Alongside other factors, that lower ratio reflected the demographic trend in our participant base. PME moreover provides a relatively good pension scheme at an affordable contribution level. That affordable contribution is important. Given the current tough competition on international markets the Metalektro sector is compelled to keep a steady eye on costs. For that reason we have been sailing close to the wind with our contribution levels over the past few decades: the best possible pension at lowest possible cost has always been our point of departure.

New governance model in July 2014 On grounds of the pension fund governance reinforcement Act, Dutch pension funds are obliged to amend their governance model with effect from 1 July 2014. The most important change is that pension beneficiaries will be represented on the governing board. PME has opted for a two-pronged model: a governing board and an accountability council. That allows the board to operate more resolutely while the management process becomes less complex. The new governance framework is explained in detail in Chapter 2 of the annual report.

Strong basis for the future Alongside the social partners and the light engineering pension fund PMT (Pensioenfonds Metaal en Techniek) PME will have greater involvement in the strategic policy and governance of pension administrator MN. That decision emerged at the end of March 2014 after many talks on the issue in 2013. The new framework gives equal voting rights to the social partners, PME and PMT. The resultant shorter lines will create a stronger and more effective partnership between all parties. Agreements have also been reached concerning the focus of MN and its core tasks. MN is thus in an optimum position to give shape to its pension administration and asset management for PME and its participants.

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SUMMARY ANNUAL REPORT PME 2013 FOREWORD

Prospects for 2015 Amendments to all Dutch pension schemes are expected to take effect on 1 January 2015. These changes are aimed at establishing a pension system that is less vulnerable to the impact of demographic trends and economic turbulence. Within this framework the social partners in the engineering industries are working on uniform pension schemes for PME and PMT. PME had already taken preparatory measures in 2013 with a view to adapting its administration in good time. Political decision-making on several key legislative issues has been regrettably long delayed. A rigorous implementation of the new system is thus under some constraint.

PME basis further expanded In the wake of the large pension funds of Stork and Siemens that have linked up with PME in recent years, several other pension funds also opted for affiliation with PME in 2013. The transfer of the Océ pension fund took effect on 1 January 2014 with a transaction involving some € 1 billion. PME is gratified to have an expanded participant base. That expansion is also beneficial in terms of job market dynamics. The governing board extends a sincere welcome to the Fund’s new participants, pension beneficiaries and employers. A few other pension funds are expected to join forces with PME in 2014 and 2015. Schiphol, 19 June 2014. For the PME governing board, Franswillem Briët Chairman

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SUMMARY ANNUAL REPORT PME 2013 FOREWORD

Financial position This chapter discusses the funding ratio and the need to cut pension benefits, as well as addressing the funding and granting of a conditional supplemental pension. On the basis of an evaluation of the recovery plan, the Board concluded that the funding ratio in 2013 was inadequate. At year-end 2013 the funding ratio stood at 103.8%. That meant PME was 0.5% behind on its recovery path towards the minimum funding ratio requirement of 104.3%. For that reason a 0.5% cut in pension benefit levels was required, over and above the measures taken earlier.

Funding ratio The funding ratio shows the extent to which a pension fund is funded. The funding ratio is the ratio of the fund’s available pension assets to its liabilities. The available pension assets are shown in the table below. Liabilities are defined as the value of the pensions accrued that the fund has to pay now and in the future. This value is reflected in the pension liabilities provision. The pension liabilities provision is calculated at a rate of interest prescribed by the Dutch Central Bank (the three-month average of the ultimate forward rate or UFR). The table below shows the situation before and after implementing the necessary cut in pensions. PME’s funding ratio is as follows:

• Figure 1: PME’s funding ratio

(Amount x € 1 million)

Available assets Pension liabilities provision before pension cut Pension liabilities provision after pension cut Funding ratio before pension cut Funding ratio after (5.1%) pension cut

31-12-2013 31-12-2012 32,332 31,157 31,004 103.8% 104.3%

31,974 34,090 32,378 93.8% 98.8%

The following table provides a more detailed insight into how the funding ratio is calculated. This involves converting the balance sheet as included in the annual accounts into available pension assets and pension liabilities provision (PLP).

• Figure 2: Breakdown of PME’s funding ratio

(Amount x € 1 million)

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31-12-2013 31-12-2012

Total assets Liabilities and other amounts payable

33,911 (1,551)

Special-purpose reserve Conscientious objectors savings fund

(25) (3)

(85) (3)

Available assets

32,332

31,974

Pension liabilities provision before pension cut Effect of pension cut as a recovery measure

31,157 (153)

34,090 (1,712)

Pension liabilities provision after pension cut

31,004

32,378

Funding ratio before pension cut Funding ratio after pension cut

103.8% 104.3%

93.8% 98.8%

SUMMARY ANNUAL REPORT PME 2013 FINANCIAL POSITION

33,244 (1,182)

32,360 32,062

Policy adopted for 2013 including the required 0.5% cut in pension benefits for 2014 led to PME achieving the mandatory minimum funding ratio requirement of 104.3% by the due date of 31 December 2013.

Conditional supplemental pension (CSP) Funding of conditional supplemental pension In late 2005, PME set up a special-purpose reserve to fund the transitional scheme for members born in the period from 1 January 1950 to 31 December 1972, inclusive. In 2010 the parties to the collective agreement decided that the conditional supplemental pension for members in the PME schemes born in the years 1950 to 1955, inclusive, were to be funded partly by means of an additional contribution. Accordingly in 2013, PME levied a contribution of 3% of pensionable earnings under the basic scheme in order to increase the special-purpose reserve. This contribution was fully paid by the employers. Of the 3% CSP contribution, half was allocated to the basic scheme in 2013. In 2014 the CSP contribution remains 3%. This was allocated in full to the special-purpose reserve. This reserve is appropriated solely to finance the conditional supplementary pension scheme for PME participants.

Grant of conditional supplemental pension In 2013 the Board decided to grant a CSP to members born in 1953. The purchase of a supplemental pension was adjusted to 85% of the original retirement forecast. The adjustment to 85% reflects an increase in life expectancy. To ensure an affordable CSP now and in the future, the social partners agreed in 2011 to adjust the CSP annually to reflect the increase in life expectancy. No decision to purchase a supplemental pension has been made for members born after 1953. The final decision to grant a CSP remains dependent on the special-purpose reserve. Movements in the special-purpose reserve were as follows:

• Figure 3: Movements in special-purpose reserve

(Amount x € 1 million)



31-12-2013 31-12-2012

Position January 1 85 186 Premium income 52 51 Contribution from group pension transfer 1 8 Purchase of conditional accruals for members born in 1952 (114) (190) (purchases for 1950 and 1951 in 2011) Investment income

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30

(60) (101) Position December 31 25 85

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SUMMARY ANNUAL REPORT PME 2013 FINANCIAL POSITION

Assets Standard asset mix 2013 • Figure 4: Standard asset mix 2013

2.0 %

1.2%

0.8%

2.1%

Fixed-income securities | 48.4%

5.8%

Equity | 29.1% High-income securities | 10.6%

10.6%

Real estate | 5.8% Commodities | 2.1%

48.4%

Private equity | 2.0% Special projects | 1.2% Infrastructure | 0.8%

29.1%

Hedge funds | 0.0%

PME investment performance • Figure 5: Actual returns and benchmark returns

Asset class 2013

Benchmark

Outperformance

Return inclusive of interest rate and inflation hedges - Interest rate hedge11 Return exclusive of interest rate and inflation hedges

1.0% 1.1% (0.1%) (7.9%) (7.9%) nvt 8.9% 9.0% (0.1%)

- Fixed-income securities - High-income securities - Equity - Real estate & infrastructure - Alternative investments

(3.1%) (4.4%) 18.9% 1.8% (4.6%)

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Portfolio

Contribution to total return

SUMMARY ANNUAL REPORT PME 2013 ASSETS

(3.3%) (4.5%) 18.0% 2.6% 1.1%

0.2% 0.1% 0.9% (0.8%) (5.7%)

Numbers at December 31 2013 2012 2011 2010 2009 Employers participating 1,259 1,296 1,266 1,229 1,222 Members (1) 144,407 146,029 141,941 139,054 146,662 - employed by an exempt company 6,233 7,491 11,122 14,402 14,211 (although participating in the TOP scheme) Members in PME basic schem 138,174 138,538 130,819 124,652 132,451 - contributory 132,381 132,818 125,686 119,326 126,643 - non-contributory due to incapacity for work 5,793 5,720 5,133 5,326 5,808 Former members (2)

316,644 320,965 316,950 343,915 328,731

Pensioners (3) Retirement pensions (temporary retirement incl.) Widow’s, widower’s and partner’s pensions Orphan’s pensions Transitional schemes (SUM old)

164,563 165,267 150,809 148,850 147,709 108,390 109,004 100,557 98,916 96,947 54,769 54,844 48,915 48,598 49,252 1,404 1,419 1,337 1,336 1,398 - - - - 112

Total (1+2+3)

625,614 632,261 609,700 631,819 623,102

Members in supplementary schemes Pension accrual over and above maximum salary Risk cover for dependant’s pension over variable salary Members with disability top-up pension Members with dependant’s benefit shortfall pension Active members Average age (in years) 1

6,713 1,351 4,808 10,068

7,201 5,645 5,357 5,950 1,364 1,459 1,378 1,678 4,782 4,392 4,960 5,149 15,231 1 7,249 7,514 8,344

45.6 45.2 44.7 43.9 44.2

Increase caused by incoming Stork Pension Fund. A relatively large number of members in this pension fund participated in the supplementary scheme.

Pension liabilities and pension assets (Amount x € 1 million)

2013 2013 2012 2011 2010 2009 after before after pension pension pension reduction reduction reduction

Pension liabilities Active members Former members Pensioners

11,954 12,013 12,403 11,080 8,549 7,829 5,203 5,229 5,254 4,469 3,540 3,162 13,847 13,915 14,721 12,874 11,783 9,907

Total pension liabilities 2 (A)

31,004 31,157 32,378 28,423 23,872 20,898

Market interest rate liabilities

2.77% 2.77% 2.46% 2.74% 3.44% 3.88%

Pension assets (B)

32,332 32,332 31,974 25,743 22,800 20,587

Funding ratio 2 (C=B/A)

104.3% 103.8% 98.8% 91.0% 96.0% 99.0%

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 he table shows the pension liabilities and funding ratio inclusive and exclusive of the expected effect of the recovery measure, i.e. T the cut in pensions. Both the pension benefits and pension accruals of the members and former members will be reduced by 0.5%. This is explained in more detail in the Report of the Board and the financial statements.

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SUMMARY ANNUAL REPORT PME 2013 ASSETS

Contributions 2013 2012 2011 2010 2009 (Amount x € 1 million) Contribution rates Rate for widow’s, widower’s and partner’s pensions 24.0 24.0 23.0 23.0 23.0 Rate for transitional schemes (TOP-SUM) - - 1.7 3.5 5.5 Rate to strengthen special-purpose reserve 3 3.0 2.5 2.0 nvt nvt Contributions Contributions to widow’s, widower’s and partner’s pensions 859 832 718 693 697 Contributions to transitional schemes (TOP-SUM) - - 87 172 284 Contributions to strengthen special-purpose reserve3 106 93 75 - Voluntary insurance and lump sums 52 49 42 31 38 Total premium income

1,017 974 922 896 1,019

Benefits paid Retirement pensions 4 Partner’s pensions Orphan’s pensions Under transitional schemes (SUM old)

962 1,065 1,001 954 907 215 217 179 171 169 3 2 2 2 2 - - - 1 10

Total benefits paid Other

1,180 1,284 1,182 1,128 1,088 2014 2013 2012 2011 2010 2009

(Amount x € 1 million)

Maximum wage State pension excess 5

70,792 69,167 67,738 66,306 65,224 64,097 15,554 15,744 15,563 15,275 15,122 14,843

Inflation rate (CPI, from July to June, inclusive)

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2.43

2.42

1.38

(0.10)

2.95

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 f this contribution, 1.5 percentage point was used for the basic scheme in 2013. As a result, contributions to the basic scheme totalled O 25.5% of pensionable earnings.

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Including commutation amounts and other benefits.

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 The pension scheme was revised on 1 January 2006. For those born prior to 1950, the pension scheme that existed prior to 1 January 2006 largely remains intact. Accordingly, the state pension excess for this group was EUR 20,221 in 2013 (2014: EUR 20,093). For the purpose of calculating pension contributions in 2013, a state pension excess of EUR 15,744 was used for all age groups (2014: EUR 15,554).

SUMMARY ANNUAL REPORT PME 2013 ASSETS

Other results 2013 2012 2011 2010 2009 (Amount x € 1 million) Investment income 300 3,679 2,249 2,531 2,345 Incoming pension transfers 230 2,787 726 (3) 86 Outgoing pension transfers 35 1 1 2 Costs (including investment costs) 94 89 86 97 89 Assets Portfolio construction at year-end 6 Fixed-income securities Equity Real estate Alternative investments Derivatives

19,297 20,165 16,053 12,938 11,798 9,937 8,084 6,116 5,770 5,214 2,126 2,253 2,043 1,743 1,665 909 1,368 1,587 2,619 2,501 - - - - (255)

Total assets invested

32,269 31,870 25,799 23,070 20,923

Portfolio construction at year-end 6 Fixed-income securities Equity Real estate Alternative investments Derivatives Total assets invested

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59.8% 63.3% 62.2% 56.1% 56.3% 30.8% 25.3% 23.7% 25.0% 24.9% 6.6% 7.1% 7.9% 7.6% 8.0% 2.8% 4.3% 6.2% 11.3% 12.0% - - - - (1.2%) 100.0% 100.0% 100.0% 100.0% 100.0%

Return on total assets invested Total return

1.0% 13.0% 9.4% 12.2% 12.6%

Z-score Z-score per annum Performance test 7

0.21 0.07 0.04 1.52 (1.97) 1.22 (0.28) (0.05) 0.06 (0.30)

Euro/U.S. dollar exchange rate

1.30 1.32 1.30 1.34 1.43

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 tarting in 2010, asset classes (assets and results) are presented in the financial highlights and Report of the Board in line with the S (strategic) investment policy set-up. More information can be found in the valuation principles.

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 he performance test shows to what extent the actual investment returns achieved over a period of five years deviate from the T investment returns on the benchmark portfolio over that same period. For performance test review purposes, the outcome of this test (as described in Schedule 1 to the Dutch Industry Pension Funds (Exemption and Penalties) Decree 2000) is presented plus 1.28. The performance test is passed if the outcome is equal to or greater than nil.

SUMMARY ANNUAL REPORT PME 2013 ASSETS

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