The document discusses the pension fund of ABN AMRO Bank and how it employs dynamic asset allocation (DAA) to meet pension promises and improve investment decision making. It outlines the stakeholders and their interests, the annual review process of the strategic investment policy where the board selects a policy based on risk-reward tradeoffs, and how experiences since 2007 show DAA provides a better match of risk-reward preferences than static mixes, particularly during downturns like 2008-2009. DAA has helped maintain the fund's funded ratio 10-20 percentage points higher than alternatives.

1. Employing DAA to Meet Pension Promises
and Improve Investment Decision-Making
at the
ABN AMRO Pensionfund
European Pensions & Investments Summit 2012
Noordwijk, 15 May 2012
Based on: Decision making and Solvency based Dynamic Cees Dert
Asset Allocation at the ABN AMRO Pensionfund, Cees Dert CEO ABN AMRO Pensionfund
and Geraldine Leegwater, Journal of Investment
Cees.Dert@nl.abnamro.com
Consultancy vol. 12 (2), pp 35-41

2. The ABN AMRO Pensionfund
Corporate pensionfund of ABN AMRO Bank
Separate legal entity, run by a Board of trustees
80,000 actives, deferreds and pensioners
Assets appr. € 12 billion AUM
Board are responsible for investment policy
Board must choose a policy that reflects a fair trade-off between
interests of active participants, deferreds, pensioners and employer
Pensionfund 2

3. Stakeholders and their interests
Pensioners
Funded ratio that enables indexation of benefits in the short term
Actives and deffereds
High long term returns to fund/restore full indexation of benefits
when they retire
Employer
Limited risk because employer has to make remedial contributions
to restore required funded levels of the fund / high expected returns
to reduce NPPC
Pensionfund 3

4. Annual review of the strategic investment policy
Complex problem :
Decisions on the allocation to a nominal matchingportfolio, a return
seeking portfolio, a real matchingportfolio. Also decisions on the use
of options and swaptions to reduce downside risk and the use of
leverage. Having to take into account long term consequences as
well as short term consequences.
Level of expertise on investments varies among trustees
Simultaneous discussion on (subjective) beliefs on investment
outlooks, types of strategy, investment instruments etc. on one hand
and and trade-offs on risk and return and interests of stakeholders
on the other hand.
Pensionfund 4

5. Decision Making Process Strategic Investment
policy
1. Board decide on assumptions to be used for ALM studies
2. Broad set of efficient policy options is provided to the Investment
Advisiory Committee
3. Investment Advisory Committee select a set of 10 policy options
and declare to the Board that presentation of policies is fair and
underlying investment policies are realistic and feasible
4. Board select an investment policy implicitly by selecting the set of
of risk- reward characteristics that reflects the best trade-off of
interests of the stakeholders. The underlying investment policy is
revealed only after the choice has been made.
Pensionfund 5
5

6. Excerpt of the decision making table provided to
the board of trustees
Criteria when using annual review of the investment Strategy 1 Strategy 2 …………. Strategy 7
policy
Expected funded ratio after 1 year 107% 109% 110%
Lowerbound 95% confidence interval of the funded ratio after 1 year 104% 99% 93%
Nett Periodic Pension Costs (mio Euro) 300 240 255
Long term potential to index benefits based on consensus forecast 24% 55% 47%
of inflation
Criteria based on assumption of unchanged policy Strategy 1 Strategy 2 …………. Strategy 7
for 15 years
Expected funded ratio after 15 years 107% 119% 126%
Probability of funiding shortage year 1 - 15 39% 27% 21%
Average pension contribution as a percentage of salary 31% 31% 33%
Average percentage point change in contribution from one year to 5% 6% 8%
the next indexation as a percentage of cumulative realized inflation
Epected 78% 78% 84%
Lowerbound 95% confidence interval of indexation as a percentage 63% 67% 95%
of cumulative realzed inflation
Pensionfund 6

7. Experiences with this proces since 2007
• Discussion on means and technique separated from discussion on
risk attitude and trade-off of interests of stakeholders
• Focus on risk-reward trade-offs for stakehoders
• Subjective opinions financial markets, investment instruments and
types of investment policies banned from the discussion
Equal footing between trustees with varying levels of investment
expertise
Decision results in implicit choice for a coherent, integrated
investment policy, in the interest of the stakeholders of the
pensionfund
Pensionfund 7
7

8. Outline of the investment policy
“Safe” matching portfolio to match return on nominal liabilities
Risky portfolio to generate excess returns to fund future indexation
No Tactical Asset Allocation
Rule based dynamic asset allocation over matching portfolio and
return portfolio since January 2007
Annual review to maintain consistency with long term goals
Dynamic asset allocation rule provides better match of risk-reward
trade-offs with preferences of the trustees than constant mix or buy
and hold policies.
Pensionfund 8

9. Solvency dependent allocation to the return
portfolio (jan 2008 – mar 2009)
• Allocation to return
% in RP
portfolio depends on
funded ratio
• Rebalance half of het
portfolio if actual weight
outside bandwith. 8 times
per year at prespecified
Funded ratio
dates
• Limited
turnover/transaction costs
Pensionfund 9

10. Dynamic allocation to the return portfolio compared
to buy and hold and constant weights
B&H • Difference in allocation
after strongly trending
CW
markets
• Low rebalancing
frequency and use of
bandwith mitigate effect
AAPF of DAA in “normal
markets”
Pensionfund 10

11. Actual funded ratio AAPF compared to hypothetical
funded ratio with buy & hold and constant weights
• Funded ratio with DAA
B&H 10-20 %points higher
AAPF
than with static mix with
same expected return
• Difference made in jan
CW
2008 – feb 2009
• In alternating markets,
DAA could have done
worse than static mixes
Pensionfund 11

12. Concluding observations
Risk-reward characteristics dynamic asset allocation provide better
match with preferences than static allocations
DAA better in strongly downtrending markets
Time for thorough decision making process
Periodic revision to maintain consistency with long term goals
Intra-year trend following, annual policy revisions contrarian
Unintended market timing?
Stick to stated policy
Pensionfund 12