'Investing for a good pension' series

November 2022

Part 2: How the Unilever Pension Fund invests
 

In the first part of this series, we explained that investing is necessary to keep pensions affordable and to be able to increase them annually. In this section we explain how we invest and that we do not take any irresponsible risks. The condition for all our investments is not only that the expected returns are attractive, but also that the risks remain manageable.

Unilever pays Forward an annual contribution that is intended for the pension accrual of all employees in that year. We invest that money and apply a well-considered investment policy that is based on an optimal balance between return and risk. Naturally, the same applies to Progress, the part of the Unilever Pension Fund where employees accrued pensions until 1 April 2015.

Policy based on five pillars
The Unilever Pension Fund's strategic investment policy is based on five pillars. Four pillars are primarily aimed at managing (to some extent, of course) financial risks while striving for a good return on investments.

The 'Sustainable investment policy' pillar deals with climate, nature, social issues and corporate governance. This pillar not only contributes to limiting (especially non-financial) risks but is mainly focused on long-term value creation.

1. Spread across different asset classes
   Investing the funds’ total assets in, say, exclusively real estate, the IT sector or China constitutes irresponsible risks. We therefore spread our investments across various investment categories (equities, real estate, etc.), but also per sector and geographically. In this way, we spread the risks.
   
   In our invested funds, we distinguish between two portfolios, each with its own degree of risk:

- Growth portfolio: this is intended to provide additional returns, with a slightly higher risk. It mainly includes equities, high-yield bonds and real estate.
- Stable return portfolio: this has a considerably lower risk.
It includes government and corporate bonds, Dutch mortgages and liquid assets.

           Our so-called 'strategic investment mix' sets out how investments are distributed across
           these two portfolios.
 

• At Forward, the distribution is: 60% growth and 40% stable return portfolio.
• At Progress, the invested funds are divided equally; both the growth and the stable return portfolio have a size of 50%.
   

2. Reduction of currency risks
   Our capital is not exclusively invested in Euro countries. This means we also have to deal with other currencies. Investing funds in foreign currencies involves risks, as those foreign currencies can become more or less valuable.
   
   In principle, this is not a risk on which we want to achieve a return, but we also do not want to incur a loss. That is why we hedge these types of risks with the help of so-called 'currency derivatives'. This makes our invested funds less sensitive to currency fluctuations against the euro.
    
3. Reducing interest rate and inflation sensitivity
   A fall in interest rates and a rise in inflation both constitute risks for pension funds. We limit these risks by taking out interest rate and inflation derivatives. In the case of interest rate derivatives, this works as follows.
   
   A fall in interest rates leads to an increase in pension obligations. This works just like a regular savings account: if the interest rate is 1%, you have to put in more to reach your savings goal many years from now than when the interest rate is 5%.
   At a lower interest rate, a pension fund therefore needs more money to pay out all current and future pensions.
   
   Pension funds can partially hedge the risk of falling interest rates. We stipulate in contracts (referred to as 'derivatives') that if interest rates fall, we will still be entitled to the agreed (higher) interest rate. This reduces interest rate risk.
   This also has a downside: if interest rates rise, the hedge actually results in a loss.
   
   The extent to which we hedge interest rate risk is linked to the level of interest rates: when interest rates are high, we hedge more than when they are low. The risk of a fall in interest rates is then greater than with a lower interest rate.
    
4. Sustainable investment policy
   The fourth pillar concerns an active sustainable investment policy. You can read more about this later, in part 5 of this series.
    
5. Application of a dynamic investment policy (at Progress)
   This pillar only applies to Progress, the part of the Unilever Pension Fund where pensions were accrued until 1 April 2015. At Progress we reduce risk when Progress is in better financial position. The purpose of this is to protect the assets for future pension increases.
    

This covered HOW we invest.
In the next article, you will read more about investing in practice.
 

'Investing for a good pension' series
Part 1: Why we invest
Part 2: How we invest 
Part 3: Investing in practice (follows later)
Part 4: Investing now versus investing in the new system (follows later)
Part 5: Sustainable investing (follows later)