Pension Funds Reporting Framework

Transcription

1 Explanatory notes Financial Assessment Framework (FTK) Investments Pension Funds Reporting Framework February 1 st 2016 Pension Funds Reporting Framework

2 Contents GENERAL EXPLANATORY NOTES... 3 Aim of the reporting requirement...3 Statutory basis...3 Who must report?...4 Reporting frequency and submission periods...5 Notation rules...5 Version management...5 Contact details...6 ANNUAL STATEMENTS... 7 J402 Specification of statement of income and expenditure...7 QUARTERLY STATEMENTS Balance sheet, funding ratio and solvency K101 balance sheet, funding ratio and solvency Investments K201 Investments for the fund's risk General K201RD Investments for members' risk K202 Investments for the fund's risk / Currency K203 Investments for the fund's risk, fixed-interest securities K204 Investments for fund's risk / Derivatives positions K205 Investment returns, investment for fund's risk and investments for member's risk Investments for the fund's risk, fixed-interest securities cash flows Fixed-interest securities cash flows Investments for the fund's risk / Geographic spread Geography Pension Funds Reporting Framework 2

3 GENERAL EXPLANATORY NOTES Aim of the reporting requirement De Nelandsche Bank (DNB) has the statutory task of exercising prudential and material supervision over Dutch pension funds. Prudential supervision focuses on the soundness of financial untakings and contributes to the stability of the financial sector. Material supervision focuses on assessment of the constitutions and rules of pension funds and others. For the proper determination of the rights and obligations of members and deferred members, it is important for the constitution and pension rules to comply with legislation and regulations. Besides both supervisory tasks, DNB also has an information task. DNB is required to periodically provide information about pension funds to several institutions. These institutions include, among others, the Ministry of Social Affairs and Employment, the Pension Feation, international overarching pensions industry organisations (such as CEIOPS). DNB also publishes data about the pensions industry in its own publications and on the internet. To be able to perform these supervision and information tasks DNB gathers pension fund data through the statements. Pension funds must submit the statements through the 'e-line DNB' reporting tool (below: e-line DNB). This Pension Fund Reporting Framework Instructions document provides notes for pension funds on how to complete the statements and submit them through e-line DNB. Statutory basis The obligation for company pension funds and industry-wide pension funds to submit the statements is laid down in Section 147 of the Pension Act (Pensioenwet) and elaborated in Section 30 ff. of the Pension Fund (Financial Assessment Framework) Decree (Besluit financieel toetsingska pensioenfondsen). In the case of occupational pension funds, this obligation is laid down in Section 142 of the Occupational Pension Scheme (Compulsory Membership) Act (Wet verplichte beroepspensioenregeling). The statements can be subdivided into yearly, quarterly and monthly statements. The rules on submission period and frequency have been laid down in the Pension Fund Reporting Statements Regulation. The Annex to this Regulation contains the models of the statements and the accompanying instructions. Pension Funds Reporting Framework

4 Who must report? All pension funds are required to submit quarterly statements on investments, but the relevant set of statements can differ from fund to fund. The set of forms applicable for a given reporting period is specified for each fund in e-line DNB. Funds in liquidation are in some circumstances exempted from submitting statements. The conditions for this have been described in the Pension Act (Exemptions) Policy Rule (Beleidsregel ontheffingen Pensioenwet) and the Occupational Pension Scheme (Compulsory Membership) Act. Pension Funds Reporting Framework 4

5 Reporting frequency and submission periods The Investments quarterly statement (K101-K205) is submitted four times a year. The submission period for quarterly statements is invariably 30 working days after the end of the relevant quarter. Notation rules All amounts entered in the quarterly statements are reported with a positive sign. Only balance amounts can have a negative sign. In addition, all amounts in quarterly statements are specified in units of a thousand euros. Version management The statements and directions change over time. This document shows at what moment the most recent change has been made to each statement. The 'last change to statement' specifies from what reporting period the change takes effect. The version management relates only to substantive changes. Correction of technical errors in the electronic forms or editorial changes to the instructions do not warrant a new version of the statements or instructions. Pension Funds Reporting Framework 5

6 Contact details Contact details for De Nelandsche Bank (DNB): De Nelandsche Bank NV P.O. Box AB Amsterdam For substantive reporting questions, you may contact the pension help desk: Telephone: For technical questions about e-line DNB, you may contact the IT service desk Telephone: Pension Funds Reporting Framework 6

7 ANNUAL STATEMENTS J402 Specification of statement of income and expenditure To be filled in by: All pension funds Latest change in statement: 2016 Latest change in instruction: 1 January 2016 Introduction In this statement, pension funds must supply detailed information on a number of items in the statement of comprehensive income and expenditure. Funds that submit a consolidated balance sheet must base this on the consolidated profit and loss account, which also applies to statement J401. In the annual statements, the "asset management costs" item is broken down into different investment categories. This item should include all asset management costs, i.e. invoiced costs as well as costs deducted from gross returns. The "look through" rule applies here, which means that the investment costs must be broken down to show all intermediate investment layers (e.g. investment funds or fundof-funds), down to the level of the actual investment. The asset management costs item relates to net costs, which means that pension funds must net any deductions they receive from the costs charged to the investment fund. Pension funds must base their reports of asset management costs on the Feation of the Dutch Pension Funds' Recommendations on administrative costs (the 2013 revised version of the further elaboration on asset management costs). 1 For the breakdown of asset management costs into various investment categories and any overlay investments, pension funds must use the relevant categories from the quarterly statements. See the explanation provided with quarterly statement K201. Question 5 consists of four columns. The first column lists the breakdown of asset management costs into investment categories and the second lists performance-related costs. The third column contains transaction costs excluding direct costs of sales and purchases. The latter are reported in the fourth column. Reporting the costs of sales and purchases in the fourth column is not mandatory but optional for funds willing and able to report these costs. Explanation Questions 1.1 to 1.4 Pension benefits Pension funds must report regular benefits, surren of small pensions and lump-sum pension benefits. For the surren of small pensions, they must report on the size as well as the frequency, i.e. the number of times they have paid out benefits on the grounds of surren. Questions 2.1 to 2.5 Breakdown of costs In addition to the total costs (as included in statement J401 un question 2.7), pension funds must also report the costs excluding asset management costs broken down into the various activities within the pension fund. This also applies if these activities are fully or partly outsourced. Costs must be broken down into the following components: - management costs: costs of management, management board, etc.; - administration costs: all costs related to pensions administration, including benefit payment costs; - consultancy and auditing costs: costs related to actuarial, auditing and any additional audits or consultancy services; - rental costs (including notional rental of own buildings). Pension funds must allocate these costs to one of the categories specified, and break them down into internal costs and outsourcing costs (purchased from third parties). All costs related to outsourced activities (e.g. to employer, auditor, actuary and controller) must be reported as "purchased from third parties." Internal costs relate to items such as staff directly employed by the pension fund, housing costs (if the pension fund owns its office building) and direct management costs (e.g. expense 1 The relevant document (in Dutch only) is available here: nsbeheer_herziene_versie_met_aanvullingen_69.aspx Pension Funds Reporting Framework 7

8 reimbursements). If funds do not allocate their internal costs to one of the above categories, they must provide an adequate estimate for the purpose of this statement. Questions 2.6 to 2.11 Breakdown to member level Funds must report administrative costs broken down to member level as well as total administrative costs. To this end, they must state the number of active members and beneficiaries at year-end for the reporting year at questions 2.6 and 2.7, respectively. These numbers should match those provided un questions 1.1 and 1.3 of statement J701. If administrative costs broken down to member level un question 2.8 differ from the amount calculated by the fund itself, the fund must provide its calculation un question 2.10, adding notes to its calculations un question For each pension fund, administrative costs expressed as amounts per member will be published on DNB's website, using the amounts entered un question 2.10 (if applicable). Question 3 Explanation Funds must in any event provide details if they have entered amounts un questions 1.7 "other revenues", 2.2 "movements in other provisions", and/or 2.8 "other expenses" of statement J401. Question 4.1 Estimates Not all costs may be known at the moment of reporting. If this is the case, funds must estimate their costs as accurately as possible and answer "yes" to this question. Question 4.2 Explanation If the answer to question 4.1 is "yes", the fund should provide an explanation including the following information: for which investment categories estimates have been given; which amounts result from estimates; the reason why the exact amounts are not or not yet known; which calculation methods have been used to make the estimates. Questions 5.1 to 5.7 Investment category costs Pension funds must allocate their asset management costs to investment categories consistent with the categories used in the quarterly statement for investments (K201). The main categories of the quarterly statements should correspond to the categories in this annual statement. Costs by investment category are spread over four columns: management costs; performance-related costs; transaction costs, and costs of sales and purchases. Column 1: Management costs including custody fees, and all asset management costs that can be allocated to an investment category but do not belong in columns 2 to 4. Column 2: Performance-related costs (performance fees) for investments in each of these categories. Column 3: Transaction costs excluding costs of sales and purchases, and in any case including acquisition costs and entry and exit charges for investment funds Acquisition costs incurred for an investment category in which no investment has been made to date are also included in this investment category. This column also includes costs for e.g. hiring an external transition manager. Column 4 (optional): Direct costs of sales and purchases by investment category, insofar as these costs are known and the fund is willing and able to report them. Mixed exposure Pension funds must report costs related to mixed funds or mandates commensurate with the exposure to the various investment categories. Costs may be broken down into types of costs per mandate or investment, provided there are no material risks to multiple investment categories. Costs associated with equity mandates, for instance, where 1 of investments is allocated to listed real estate and 2 of investments to liquid, do not need not be broken down into costs for equities, real estate and other investments, but may be reported in the relevant categories commensurate to the interest in these categories. However, in the case of a mixed fund with 50 of investments allocated to equities and fixed-interest securities, costs must be broken down and allocated to the specific costs related to equities and the specific costs related to fixed-interest securities. Liquid Costs related to liquid held for margin requirements or other ivatives exposure purposes, must be reported un the investment category for which they are held. Costs of other liquid, such as a strategic allocation to cash, are reported un costs of other investments in accordance with K201, question 5.7. Pension funds must then provide details of these costs un question 7.1. Pension Funds Reporting Framework 8

9 Question 5.9 Overlay costs If possible, costs for overlay investments can be allocated to an investment category and consequently included in the relevant line ( ). This line can include overlay investments that have not been assigned to an investment category, for example costs of currency hedging. The explanation to question 7.1 must state what these investments entail. Question 5.11 Costs of asset management for pension funds and administrative agencies Pension funds (e.g. investment committees) and any administrative agencies incur costs for asset management. These costs must be allocated and reported un this heading. Question 5.12 Costs for fiduciary management Costs related to fiduciary management cannot be allocated to investment categories and must be reported here. Question 5.13 Custody fees Preferably, custody fees should be reported un the relevant investment category in questions 5.1 to If allocation across investment categories is not possible, total custody fees must be reported here. Question 5.14 Asset management advisory fees All costs pension funds incur for advice on asset management are reported here. This may include fees paid for risk budgeting studies, external asset management advisers or legal advice on asset management. Question 5.15 Other asset management costs Here pension funds should only state amounts that cannot be allocated to an investment category or reported un any other, more specific, questions in statement J402. The explanation to question 7.1 states what such costs entail. Questions 6.1 to 6.5 Asset management costs as a percentage of invested capital Un question 6.2, pension funds should calculate asset management costs (excluding transaction costs) as a percentage of the average managed. If asset management costs as a percentage of capital invested stated un question 6.2 differ from the percentage calculated by the fund, the fund must report its own calculation un question 6.4, providing an explanation to its calculations in explanatory field 6.5. Questions 6.6 to 6.9: Transaction costs as a percentage of capital invested Un question 6.6, transaction costs as a percentage of average capital invested are stated. Only if transaction costs as a percentage of average capital invested calculated in question 6.6 differ from the percentage calculated by the fund, the fund reports its own calculations un question 6.8, providing an explanation in explanatory field 6.9. Asset management and transaction costs as a percentage of capital invested will be published on DNB's website for each pension fund. This table will state the percentages entered un questions 6.4 and 6.8 (if applicable). Question 7.1 Notes to asset management costs Pension funds will at least provide notes if they stated any amounts un question 5.7 "other investments" or question 5.15 "other asset management costs." If amounts are also stated un question 5.9, pension funds should provide additional details about the relevant overlay in their notes. In addition, pension funds are required to provide details if there are significant changes in asset management costs compared with the preceding year. An example would be higher fees paid for a new investment category, because one-off start-up costs are made to start investing in a particular category. Question 7.2 Notes to differences with the statement of income and expenditure The total amount of asset management costs may differ from the amount stated in the annual accounts (as included in statement J401, question 1.5), e.g. if this amount based on invoiced costs only. If total asset management costs stated un question 5.17 differ from asset management costs stated in statement J401 (question 1.5), funds are required to explain the difference. Pension Funds Reporting Framework 9

10 QUARTERLY STATEMENTS Balance sheet, funding ratio and solvency K101 balance sheet, funding ratio and solvency To be completed by: All pension funds Frequency: Quarterly Last change to statement: First quarter of 2015 Last change to instructions: 1 January 2015 Introduction The pension fund's unconsolidated balance sheet is presented in K101, in accordance with reporting statement J301. An important starting point for this statement involves the transfer of risks. Three main forms can be identified in this respect: 1. the situation in which the fund itself manages the risks; 2. the situation in which the members bear the investment risk and the entitlement of an individual member depends on the returns achieved on the investments; and 3. the situation of reinvestment on the basis of a guarantee contract. The distinction is made visible on the and liabilities sides of the balance sheet. The valuation of balance sheet items in this statement is based solely on current. Notes Question 1.1: Intangible Intangible are fixed which are not tangible. Intangible can be shown on the balance sheet only if they have a market that can be determined objectively. The valuation is based on an estimate of the useful life. Question 1.2: Participating interests Participating interests are investments in untakings that involve economic control and a strategic period of ownership. Question 1.3: Investments for the fund's risk Here the total investments for the fund's risk are reported. Question 1.4: Investments for members' risk Investments in which the investment risk (both upwards and downwards) is borne by the individual members should be reported here. These investments are not included in the calculation of the funding ratio. Question 1.5: Reinsured part of technical provisions This item relates to situations in which the pension liabilities are reinsured on the basis of a guarantee contract. As such it covers the entire technical provision reinsured on the basis of a guarantee contract. The valuation of this balance sheet item must be carried out in accordance with the principles of the Financial Assessment Framework. The reinsured pension liabilities may not be deducted from the technical provisions item on the liabilities side. Question 1.6: Investments based on other schemes This question concerns the total of the investments for early retirement and VPL catch-up pension. Question 1.7: Other Receivables, prepayments and accrued income, liquid not available for investment and other, with the exception of in respect of investment transactions yet to be settled, are reported un 'Other'. This class of cannot include where the risk is borne by the members; if this is the case, they should be reported un investments for the members' risk. Assets in respect of investment transactions yet to be settled are part of the 'Investments for fund's risk' class, 'Other' subclass, on statement K201. Question 2.1: Own funds Pension Funds Reporting Framework 10

11 In answer to this question the pension fund reports on its own funds. A breakdown of this item into specified reserves on the one hand and other own funds on the other is not necessary. Question 2.2: Subordinated loans Subordinated loans are debts of the pension fund. Generally, subordinated loans (or part of them) contribute to the solvency of the pension fund. See question 3.3. Question 2.3: Technical provisions The technical provisions item concerns only the provisions on account of unconditional pension liabilities. In keeping with the division on the side of the balance sheet, the item is broken down into a part in which the risk is borne by the fund, a part in which the fund has transferred risk to a reinsurer by means of a guarantee contract, and a part in which the risk is borne by the members (i.e. the investment risk is borne by the members and the entitlement of the individual member depends on the returns achieved on the investments). If the technical provisions cannot be calculated exactly, the fund can suffice by reporting an estimate in accordance with the following guidelines. When the technical provisions for the fund's risk are estimated, the following aspects must be taken into account in so far as they relate to or have taken place in the relevant quarter: accrual in accordance with the pension rules (see below); increase or decrease due to group membership transfers or other membership changes that have a significant effect on the technical provisions; adjustment of the technical principles: granting of supplements; curtailment decisions; payments made; required interest (see below); changes to the interest rate term structure (see below). The quarterly accrual in accordance with the pension rules can be approximated by taking 25 percent of the actuarial contribution required for the 'annual purchase' of the unconditional, for-fund's-risk parts of the pension contract. This contribution component is reported by the fund in statement K401. 'Required interest' means here the interest added to the technical provisions in the relevant quarter. This is estimated on the basis of the technical provisions at the end of the previous reporting year and the interest rate for the first year of the interest rate term structure that applied on 31 December of the previous reporting year. Interest on the increase and decrease in the technical provisions during the current reporting year may be disregarded. Effects of changes in the interest rate term structure must always be estimated by reference to the cash flows into and out of the technical provisions and the interest rate term structure on the reporting date. The fund may only apply an approximation method based on the difference in interest rates for items added in the estimation to the technical provisions at the end of the previous reporting year if and in so far as this is necessary because these items have not yet been translated into cash flows. The fund checks in that case that the possible deviations (caused by non-parallel changes in the interest rate term structure) are not material at the overall level. Question 2.4: Other provisions This should include, if applicable, provisions not directly connected with the administration of the pension scheme(s). Question 2.5: Other liabilities Here the other liabilities are mentioned. Liabilities on account of investment transactions yet to be settled come un 'investments for the fund's risk' or 'investments for the member's risk', and are thus reported on the side. They are set off against receivables in respect of investment transactions yet to be settled. Question 3: Available solvency The solvency position in line 3 is the result of five elements. These are explained below. Question 3.1: Own funds The own funds referred to in question 2.1 are copied automatically into question 3.1. Question 3.2: Intangible Intangible as reported in question 1.1 are copied into question 3.2. Pension Funds Reporting Framework 11

12 Question 3.3: Subordinated loans, in so far as they contribute to solvency In certain circumstances, subordinated loans may be wholly or partly aggregated with the total available previously calculated. Subordinated loans have a special position in relation to solvency calculations. The extent to which such loans can contribute to solvency is limited in the Pension Fund (Financial Assessment Framework) Decree (Section 8); see also the Q&A on Open Book Supervision at The Pension Fund (Financial Assessment Framework) Decree contains further rules for the determination of the minimum regulatory own funds and the regulatory own funds. The decree in question also sets out what capital components are included as 'part of own funds'. The total of the capital components thus designated are referred to in the yearly statements as the available solvency. This note on the concept of 'solvency' is in keeping with statement J501. Question 3.4: VPL Act surplus The reserve created by the purchase scheme un the VPL Act does not count towards the calculation of the available solvency. The fund includes an adjustment item for this reserve in so far as the reserve has not been included in its own funds. Question 3.5: Other adjustment items (if applicable) For the correct determination of the estimated funding ratio it may be necessary to adjust the own funds still further. This may be because certain reserves are not counted in the determination of solvency. The pension fund shows any other adjustment items to the own funds un question 3.5. The pension fund itself assesses what corrections are necessary, given the existing legislation and regulations. An adjustment item which results in lower solvency must be shown as a negative amount. An adjustment item which results in higher solvency must be shown as a positive amount. If the fund consis that a positive correction may be made, this is submitted to DNB in advance for approval. If other adjustment items are applicable, these are to be explained in the explanation field. Question 4.1: Funding ratio () This percentage is calculated from the amounts of question 3 (available solvency) and question (technical provisions for fund's risk) The formula is as follows: The amount of the available solvency is divided by the technical provisions for the fund's risk. 1 is added to the outcome of this division and the result is multiplied by 100. Please note: as the funding ratio calculated at 4.1 relates to the technical provisions for the fund's risk, partially reinsured funds have to provide a further explanation of their financial position at question 8. Question 4.2.1: Required funding ratio () actual mix The fund reports the required funding ratio on the basis of the actual investment mix at the end of the quarter. Question 4.2.2: Required funding ratio () strategic mix The fund reports the required funding ratio on the basis of the strategic investment mix at the end of the quarter. Question 4.3: Policy funding ratio () The fund reports the policy funding ratio as the moving average of the reported funding ratios of past twelve months. In 2015, un the applicable transitional regime, the funding ratios of a calendar quarter in 2014 may be taken as the funding ratios of the calendar months in that quarter. This option should be consistently applied throughout Question 4.4: Notes on strategic and actual required funding ratio (and difference between them) The fund is asked to provide an explanation of the material end-of-quarter difference between the required funding ratio as based on the actual mix and as based on the strategic mix. It is asked, in particular, to indicate why the actual investments differ from the strategic mix as recorded in the investment policy and within what period the fund expects to achieve the strategic mix. Question 5: Modified duration of the technical provisions for fund's risk (in years) The fund reports the modified duration of the technical provisions for the fund's risk at an aggregate level, to one decimal place. The modified duration of the technical facilities is determined by exposing the yield curve published by DNB to a shock of 1 basis point. The change induced by this shock is then multiplied by 100 and should be presented as a percentage of the current technical provisions. Question 6: Actual hedging of interest rate risk () Pension Funds Reporting Framework 12

13 The fund reports here the actual extent to which the interest rate risk is hedged, according to its own definitions. Question 7: Interest rate hedging standard weighting () Here the fund reports the strategic degree of interest rate risk hedging and the imposed upper and lower limits based on its own definitions in accordance with the actual hedging rate in question 6. If the fund does not apply a standard weighting to the interest rate risk hedge, this should be explained. Question 8: General notes on balance sheet and solvency The fund should in any event provide an explanation if any of the questions 1.7, 2.4, 2.5, 3.3, 3.4 or 3.5 have been completed. If the fund has reinsured part of the technical provision through a guarantee contract, the funding ratio un 4.1 does not provide complete information about the financial position. The fund should in that case explain in figures the solvency position on the basis of the complete technical provisions by reporting here the technical provisions un the guarantee contract in euros as well as the minimum regulatory own funds in euros. Question 9: Solvency test At questions 9.1 to 9.8 the fund reports on the result of the separate shocks per risk class and the total required solvency, initially and in the equilibrium situation, and on the basis of both the actual investments and the strategic investment policy. The calculation of the 'S1 interest rate risk' in response to questions 9.1.1, and 9.1 relates to the most adverse scenario for the fund involving a fall or rise in interest rates. The impact of the shocks is reported un and as positive numbers; even when it concerns a rise in interest rates. The net loss for the most negative scenario is reported as Total S1 interest rate risk un question 9.1. For a fall in interest rate, this means: Total S1 interest rate risk = max(effect on liabilities Effect on ; 0). In case of a rise in interest rate: Total S1 interest rate risk = max(effect on Effect on liabilities; 0). 'S' risks not mentioned explicitly must be reported un 'Other risks'. If the fund enters a in response to question 9.8 'Total other risks', it must provide an explanation of the unlying scenarios in response to question 10. Subtotals are also explained there. The solvency test is reported un question 9. The solvency test in the 'equilibrium' column is also taken as input for the calculation of the required funding ratio un question (actual) and question (strategic), where the required solvency is expressed as a percentage of the pension liabilities for the fund's risk. For a detailed explanation of the calculation of the solvency test reference should be made to Open Book on Supervision at and, in particular, the links provided there and on the unlying web pages to the Q&As on the different elements of the regulatory own funds. Consiations and points for attention The correlations between S1 and S2 and between S1 and S5 depend on the scenario (rise or fall in interest rates) that is used for calculating interest rate risk: The difference between actual and strategic is that actual is based on the current allocation to the different asset classes and the actual degree of interest rate hedging (actual interest-rate sensitivity of the investments), whereas strategic is based on the standard allocation adopted by the pension fund for the various asset classes and the strategic degree of interest rate hedging (e.g. a target hedging rate or a strategic interest-rate sensitivity of the investments, such as duration). The difference between the initial shock and the shock in equilibrium is that the former requires the application of the shocks to the current of the investments in accordance with the actual or strategic allocation and interest rate hedging. The results of the application of the shocks in equilibrium are such that if they are applied to a balance sheet equal to the actual/strategic regulatory own funds (see lines and 4.2.3) multiplied by the technical provisions, this results in a funding ratio of 100 per cent after the shocks. The shocks in equilibrium are often the outcomes of an iterative process in which the shocks are first applied to the actual and strategic initial balance sheet; thereafter the balance sheet is increased or reduced to such an extent that application of the shocks results in a funding ratio of 100. In short, in or to arrive at a report of the actual and strategic regulatory own funds on lines4.2.1 and 4.2.3, all reported shocks of lines 9.1 to 9.8 must have been calculated. Without the interim results on lines 9.1 to 9.8 the actual and strategic regulatory own funds on lines and could not be calculated. Pension Funds Reporting Framework 13

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15 Investments K201 Investments for the fund's risk To be completed by: All pension funds with technical provisions for the pension fund's risk Frequency: Quarterly Last change to statement: First quarter of 2015 Last change to instruction: 1 January 2015 General This quarterly statement provides an itemisation of the investments by sub-classes for the fund s risk. Investments for the members' risk and investments made un a guarantee contract are not reported here. The purpose of K201 is to shed light on the risk positions of the pension fund. In addition, K201 checks the extent of adherence to the strategic investment policy by comparing the actual asset allocation with the strategic standard weightings. The investments must be reported at their market. Shares are reported inclusive of dividend claims, and fixed-interest securities inclusive of accrued interest. In addition, the so-called 'look-through' principle must be applied to the asset class breakdown when reporting on the investments. Application of this rule provides the most accurate picture possible of the investment risks. The K201 quarterly statement consists of eight columns, if the fund does not have any overlay investments (such as an interest rate swap overlay). If the fund does have overlay investments, quarterly statement K201 consists of 20 columns: two times eight columns for the mandate and overlay investments respectively and four columns for the sums of the mandate and overlay investments. Columns 1-4 and 9-12 contain the market and the exposures of the investments and ivatives respectively. Columns 5-8 and contain the standard weightings relevant to the mandate and overlay investments respectively. Pension Funds Reporting Framework 15

16 Breakdown of asset classes Question 2: Real estate investments Question 2.1.1: Direct investments in real estate, residential Question 2.1.2: Direct investments in real estate, commercial Question 2.2.1: Indirect investments in real estate, listed, residential Question 2.2.2: Indirect investments in real estate, listed, commercial Question 2.3.1: Indirect investments in real estate, unlisted, residential Question 2.3.2: Indirect investments in real estate, unlisted, commercial Direct investments in real estate comprise direct interests as well as interests in the form of participating interests or other interests that are not designated as investment institutions. Direct real estate investments never involve any form of leverage via external financing. In addition, indirect investments should be broken down into listed and non-listed investments. It is important for investments though equity funds and/or mandates in listed real estate (e.g. through Real Estate Investment Trusts (REITs) and/or investments in listed property companies such as Unibail Rodamco and Wereldhave) to be reported here as well. Residential real estate means homes, and commercial real estate means all nonresidential property. If the exposure of the investments in listed real estate does not exceed 0.5 percent of the total invested capital, these investments need not be broken down into residential and commercial listed real estate, but may be reported in full un listed commercial real estate. If the breakdown between commercial and residential real estate is not yet available at the end of the quarter on which the fund is reporting, the breakdown of the previous quarter may be used unless the interest in commercial and residential real estate changes materially from one quarter to the next. Question 3: Shares Question 3.1: Mature markets Question 3.2: Emerging markets The investments in shares are broken down into investments in mature and in emerging markets. Shares from OECD countries are classified as investments in mature market shares. All other listed shares are treated as emerging market shares. If a different classification of mature and emerging markets then the OECD classification is being used it may be applied (provided that the differences are not material). Question 4: Alternative investments Alternative investments mean investments in private equity, the shares of unlisted companies, infrastructure and micro financing. Question 4.1.1: Private equity, listed Private equity funds which are listed or listed untakings which mainly invest in turn for their sharehols in the shares of unlisted untakings are reported on line Examples of listed private equity investments are HAL Investments and KKR; it is therefore necessary to check whether interests in listed private equity occur in standard equity funds and/or mandates. Commitments in a private equity mandate which have not yet been entered into should be reported un the category in which these are currently invested. Question 4.1.2: Private equity, unlisted Investments in unlisted private equity funds are generally reported on line Question 5: Fixed-interest securities Question 5.1: Government bonds, non-index-linked All government bonds which are not linked to inflation, irrespective of their credit rating, are reported on line 5.1 un 'Government bonds'. Question 5.1.1: Government bonds, non-index-linked, mature markets Government bonds issued by developed countries are reported on line Government bonds issued by OECD countries are reported un mature markets. Bonds issued by supranationals such as the World Bank, ESM and so forth are also reported un government bonds mature markets, unless the supranational is clearly connected with emerging markets. Residential mortgage-backed securities (RMBS) agencies (Fanny Mae, Freddy Mac etc.) are reported not un government bonds but un RMBS. Question 5.1.2: Government bonds, non-index-linked, emerging markets Pension Funds Reporting Framework 16

17 Non-index-linked government bonds issued by developing countries are reported on line Question 5.2: Index-linked bonds All government bonds which are linked to an inflation index, irrespective of their credit rating, are reported on line 5.2 un 'Index-linked bonds'. This applies to both government and corporate bonds. Question 5.3: Mortgage loans Mortgage loans and mortgage-backed securities are reported un mortgage loans on one of the lines from to There is a split between direct mortgage loans and mortgage-backed securities; in the case of direct mortgage loans, there is exposure, whether or not through a fund or mandate, to full mortgage loans without restructuring to other maturities, different credit classes etc. such as mortgagebacked securities often do include. This exposure to mortgages is also broken down according to whether the mortgage loans have commercial or residential collateral. Question 5.4: Credits The credits item on line 5.4 contains only bonds and loans not issued by government bodies. These include asset-backed securities (with the exception of mortgage-backed securities, see 5.3 Mortgage loans), CDOs, bank loans, private loans, syndicated loans, convertible bonds, subordinated bonds, covered bonds and so forth. Credits can have risk characteristics which could be entered on various lines. However, they should be reported on one line only, according to the following hierarchy: 1. First of all, ABS and CDOs are reported on lines and If the credit concerns a private loan (or a bank loan or syndicated loan) provided directly by the pension fund itself or through an investment fund, the loan is reported un private loans, syndicated loans or bank loans on one of the lines to We distinguish in this connection between bank loans, loans originally granted by banks and (partly) taken over by pension funds, syndicated loans, loans granted by a syndicate of which the pension fund forms part and loans granted privately by the pension fund itself or through an investment fund. 3. After the division of private loans into sub-classes, the remaining convertible bonds are reported on line Here, only bonds which are convertible at the request of the investor are reported (i.e. not bonds which are to be converted into equity capital, either automatically or on the issuer's initiative). Privately granted convertible bonds (loans) are reported un private loans. 4. Next, subordinated bonds are entered on line 5.4.2; this also includes bonds that are to be converted into equity capital either on the issuer's initiative or automatically. 5. Of the remaining products, the covered bonds are reported on line Finally, the remaining standard bonds are reported on line 5.4.1, in so far as they do not relate to cash or short-term receivables. Question 5.5: Short-term receivables and liquid Un short-term receivables and liquid (line 5.5) the rapporteur mentions all moneys and deposits which are due and payable immediately and are not kept for margin obligations or otherwise for ivatives exposure. A distinction is made in this connection between cash (demand deposits) on line and short-term receivables with a maturity of less than a year on line Short-term receivables/loans and Liquid and short-term receivables held for margin obligations or otherwise against the exposure to ivatives, are reported on line un ' '. Question 6: Hedge funds Investments in hedge funds (or funds) must be reported on line 6.1. Complete look-through does not apply to hedge fund investments; the positions held by hedge funds need not be reported in the relevant category. However, a pension fund should itself be fully aware of the positions and risk profile of the hedge fund investments. Question 7: Commodities Investments in non-financial such as commodities are reported on line 7.1. Short-term receivables and liquid on account of ivative positions held against the exposure to commodities ivatives are not reported here but on line un ' '. Question 8.1: Collateral obligations Collateral obligations connected with securities lending and repurchase agreements (repo) are reported un category 8.1. Such transactions are viewed as entering into a loan. The size of the loan is reported on line un securities lending or on line un repo. In the case of securities lending a negative number is entered on these lines as it concerns an obligation on the part of the pension fund. Where securities are borrowed, the reverse applies and a positive number is entered. The collateral obligations as a consequence of changes in the of ivatives are reported on line Where ivatives have a positive market, collateral is generally received; the market of this Pension Funds Reporting Framework 17

18 collateral is reported on line in column 1 (or column 9). The market of the ivative is reported in column 4 (or column 12). Question 8.2: Reinvestments The reinvestment of the loans received above is reported on line 8.2, provided that this reinvestment does not give rise to material additional risks. This also applies if received collateral is not reinvested on account of the positive of ivatives. If there are material additional risks, the reinvestments are reported un the asset class to which they relate and the reinvestment should be explained in the explanation field. This would be the case, for instance, if cash received as collateral in securities lending is reinvested. With like-for-like transactions, where securities are lent against collateral consisting of similar securities, equal but opposite amounts are reported on line 8.1 and line 8.2 in column 1. If the collateral received as a consequence of a positive market of ivatives is not reinvested, the market of the received collateral is reported in columns 1 (or 9) and 4 (or 12). The balance of the collateral and the market of the ivatives are reported in column 4 on line 8.6. Below we describe how securities lending and repos must be reported in a number of situations that can arise in practice: Example of securities lending (like-for-like) As an example of reporting securities lending without taking material additional risks, we will assume that shares worth 100 million are lent in return for other, less liquid, shares worth 110 million. The of the collateral obligation (-/- 110 million) is reported on line in the first column. The fourth column shows the counter of the unlying lent securities ( 100 million). The difference of 10 million is due to overcollateralisation. This is effectively an obligation to the counterparty (the borrowing party). This obligation is reported in the fourth column of line 8.6 un 'Other investments'. The of the less liquid shares received ( 110 million) is reported as a reinvestment on line 8.2. Mandate Overlay Exp Sec. lending Reinvestment Other 0-10 Example of securities lending (reinvestment) Reinvestment of collateral should always be explained in the Explanation field. We will again assume a share lending programme of 100 million. In this case, however, the received collateral consists of 110 million in cash, which is reinvested in money market funds. The collateral obligation is once again reported on line as minus 110 million in column 1, with the counter of the lent shares ( 100 million) in column 4. This is effectively the exposure of the collateral. The reinvestment of 110 million in money market funds should in this case be reported on line short-term receivables. An exposure of -/- 10 million occurs in column 4 on line 8.6 as a result of the overcollateralisation. In this situation, should also be mentioned in the explanation field that 110 million in collateral from securities lending has been reinvested in short-term claims. Mandate Overlay Exp Short-term claims 8.1.x Sec. lending / repo 8.2 Reinvestment Other 0-10 Now suppose that the of the money market funds decreases to 100 million and the of the lent securities increases to 125 million. The loss on the money market funds is borne by the pension fund and the party borrowing the shares is not obliged to make up the shortfall of 10 million. The Pension Funds Reporting Framework 18

19 of the reinvestment in money market funds of 100 million is reported on line However, the borrower is called to deposit 25 million in extra collateral owing to the increased of the borrowed shares. The resulting of the lent securities of 125 million is reported in the fourth column on line The collateral deposit ( 135 million) is reported on line in the first column. The extra 25 million collateral is not immediately reinvested in money market funds. This is why it is reported on line 8.2. There is still overcollateralisation, as is evident from the difference between columns 1 and 4 on line Mandate Overlay Exp Short-term claims Sec. lending Reinvestment Other 0-10 In this example, the totals of the columns add up to -/- 10 million. This corresponds to the loss of 10 million borne by the pension fund. If, in the above example, the additional collateral of 25 million has not yet been deposited, this is reported on line 8.6 as a 25 million claim on the counterparty. Mandate Overlay Exp Short-term claims Sec. lending Reinvestment 8.6 Other Example of a repo If a pension fund borrows 90 million in liquid and, in return, provides collateral of 100 million (in the form of government bonds) in a repurchase agreement (repo), this is reported as follows in statement K201: Mandate Overlay Exp Short-term claims repo Reinvestment 8.6 Other 0 10 The liquid are reported on line (short-term claims) to the of 90 million. The of the loan is reported on line 8.1 in column 1. This represents an exposure of 100 million, which therefore shows overcollateralisation of 10 million. The overcollateralisation is reported as a claim in column 4 of line 8.6. This presentation is based on the assumption that the loan is held in cash. If it is invested in a different asset class or sub-class, it should naturally be reported on the line of the relevant class or subclass. If the government bonds depreciate to 80 million and no additional collateral has yet been deposited by the pension fund, this is reported as follows: Pension Funds Reporting Framework 19

20 Mandate Overlay Exp Short-term claims repo Reinvestment 8.6 Other 0-10 In this situation an obligation of 10 million remains in column 4 on line 8.4 owing to the decline in the of the collateral. Question : All short-term claims and liquid that are held against margin calls or that otherwise unlie the exposure due to ivatives are reported on line un other liquid. Question 8.4: Structured notes The market of structured notes is reported on line 8.4; structured notes are often characterised by exposure to both the issuing party and a specific asset class, for example shares or commodities. Column 1 reports the market of the structured note, but the exposure to the issuing party is reported in the column un fixed-interest securities, depending on the properties of the issuing party and of the structured note. If, for example, there is collateral, the exposure is reported un covered bonds on line The exposure to the asset class must be reported as well, as a positive exposure on the relevant line and as a negative exposure on line. Question 8.5: Total return swaps The market of a total return swap is reported on line 8.5 in column 2; the exposure of the total return swap is reported in column 3 on the line of the asset class to which exposure has been obtained, while a rho equivalent must be reported in column 3 on line. Many (synthetic) exchange-traded funds (ETFs) have a total return swap; on behalf of a complete look-through, this total return swap must be reported separately. Question 8.6: Other The 'Other' item un 'Other investments' on line 8.6 contains all investments which cannot be reported un one of the sub-classes previously mentioned. The investments reported on line 8.6 should always be explained in the text field on line Question 10.1: Currency overlay Currency ivatives should be reported on line For a further explanation on the reporting of currency ivatives, reference should be made to page 31 Currency overlay. A description is given on page 40 of how the currency ivatives should be divided between mandate and overlay investments. Question 11: Interest rate hedge All investments used to hedge the nominal interest rate risk of the obligations should once again be reported on line 11.1 un the item entitled 'of which (products held for) interest rate hedging of technical provision'. This falls outside the aggregate count on line 11 because it concerns an 'of which' item. Incidentally, investments on line (other liquid ) are not aggregated with the interest rate hedge. After all, such investments, in particular the rho equivalents, do not contribute to the interest rate hedge. An example of how to complete this line is given on page 35. Derivatives (columns 2, 3, 10 and 11) Using examples, this section describes how pension funds must report their ivatives in statement K201. The market of ivatives contracts must be broken down into a delta equivalent and an rho equivalent in this statement. The delta equivalent can be described as the quantity of unlying that must be held to obtain an exposure equal to that of the ivative given minor changes in the unlying asset. The rho equivalent is the implicit form of financing of this exposure. In consequence, the rho equivalent for some ivatives can be seen as a closing entry when completing K201. The rho equivalent of the ivatives is reported on line ' '. Depending on whether the Pension Funds Reporting Framework 20

21 ivatives involve mandate or overlay investments, the ivatives are reported in columns 2 and 3 or columns 10 and 11. Interest rate swaps The market of an interest rate swap is reported in the second column of K201 on the Government bonds line. When entering an interest rate swap in K201, we treat this as a combination of a bond with a fixed interest rate (fixed leg), including notional, and a bond with a floating interest rate (floating leg), including notional. The difference in between these two bonds is the of the swap. The delta equivalent of a receiver swap is equal to the market of the fixed-rate bond and the rho equivalent is equal to the market of the floating-rate bond. Example 1: interest rate swaps Let us take as an example a 4 receiver swap with a term of 30 years and a notional of 100 million. Initially, an interest rate swap generally has a of zero. We assume a flat yield curve of 4. The of a bond with coupons of 4 and a notional of 100 million is 100 million at the start of the swap and the of the floating leg is also 100 million. At the start of this swap, K201 is therefore completed as follows: Mandate Overlay Exp Government bonds The delta exposure of the swap is the of the swap s fixed leg on line 5.1, and the floating leg s is the rho equivalent un. The sum of the delta exposure and the rho equivalent is equal to the market of zero. If the interest rate rises to 5 in the next quarter for all maturities, the of this receiver swap will fall. This fall is due to the decrease in the of the fixed-rate bond, the fixed leg of the swap, to about 85 million. There is little or no change in the of the floating-rate bond, the floating leg of the swap. The of the receiver swap thus decreases from 0 million to minus 15 million. This is reported as follows in statement K201: Mandate Overlay Exp Government bonds The sum of the delta exposure and the rho equivalents is equal to the market of minus 15 million. If the interest rate falls to 3, the of the swap rises to 20 million due to the increase in the of the swap s fixed leg to 120 million. The of the floating leg remains 100 million. This situation is reported as follows in K201: Pension Funds Reporting Framework 21

22 Mandate Overlay Exp Government bonds Interest rate swaptions For reporting purposes, interest rate swaptions are seen as options on (forward starting) interest rate swaps. Once again, the market of the swaptions is entered in the second or tenth columns of statement K201 on the 'Government bonds' line. The delta equivalent of the swaption corresponds with the delta equivalent of a position in the (forward starting) interest rate swap (to which the swaption hol is entitled) that has the same basis point (DV01). The rho equivalent on the ' ' line is more or less a closing entry and reflects the difference between the market of the swaption and the delta equivalent. In this way, the second and third (or tenth and eleventh) columns market and delta rho equivalents add up to the same amount once more. Example 2: interest rate swaptions As an example, we take a receiver swaption with a notional of 100 million entitling the hol in 5 years time to enter into a 30-year receiver swap yielding 4 annually on 100 million. The of the forward starting swap is also the difference between a fixed-rate bond (fixed leg) and a floating-rate bond (floating leg), both with terms of 30 years, which only 'start' in 5 years' time. With a flat yield curve of 4 the swaption is forward-at-the-money, so that the forward starting swap currently has a of zero, as both the fixed leg and the floating leg are worth about 82 million. The delta equivalent of the forward starting swap is, therefore, 82 million. The market of the swaption (depending on the model, assumptions etc.) is 9.5 million, and this amount must be stated in the second or tenth column of K201 on the government bonds line. The delta equivalent of the swaption must correspond with an equivalent position in the 5-30 forward starting swap. For this purpose, we determine, for both the swaption and the unlying 5-30 forward starting swap, the basis point (BPV) or DV01, i.e. the change in the of these contracts if the relevant yield curve rises or falls by 1 basis point. The table below gives the of the swaption and the forward starting swap if the interest rate rises or falls by 1 basis point (): swaption (forward starting) swap BPV / DV The BPV of the swaption is 0.07, which means that if the interest rate rises or falls by 1 basis point the of the swaption falls or rises by 70,000. The BPV of the forward starting swap is A single position in the swaption therefore corresponds with 0.07 / 0.14 = 0.5 position in the forward starting swap. The delta equivalent of the swaption thus works out at 41 million, as this is equal to million (the delta equivalent of the forward starting swap). The rho equivalent, finally, is the difference between the of the swaption and the delta equivalent of the swaption: = million. This swaption is reported as follows in K201: Mandate Overlay Exp Government bonds Pension Funds Reporting Framework 22

23 If the interest rate rises to 5 for all maturities in the next quarter, the of this receiver swap will fall to 4.3 million. In addition, the delta equivalent will also change, as the swaption becomes more outof-the-money. For this purpose, we again calculate the BPV of the swaption and the unlying forward starting swap: swaption forward starting swap BPV / DV It follows that a single position in the swaption corresponds with 0.03 / 0.10 = 0.3 position in the forward starting swap. Due to the interest rate increase, the delta equivalent of the forward starting swap has decreased to about 66 million. As a result, the delta equivalent of the swaption is = 19.8 million. The rho equivalent in this case is = million. This is reported as follows in statement K201: Mandate Overlay Exp Government bonds Cross-currency interest rate swaps Cross-currency interest rate swaps are treated in the same manner as standard swaps: fixed legs of the swaps are reported in euros on line un 'Government bonds', and floating legs of the swaps are reported in euros on line un ' '. Below, we describe how three variants of crosscurrency interest rate swaps must be reported in K201. Example 3: Cross-currency interest rate swaps Our first example concerns a cross-currency interest rate swap with a five-year term where the Japanese 6-month interest rate is paid and the 6-month USD-LIBOR is received on a notional of respectively 1,000 million and $12.5 million. For K201 reporting purposes, we see this swap as a floating rate loan of 1,000 million to finance a position in a US floating rate note of $12.5 million. At the start of the swap, the exchange rate of the Japanese yen versus the euro is 100/ and the exchange rate of the US dollar versus the euro is $1.25/. The euro of the short position in the Japanese floating rate note amounts to 10 million (rho equivalent) and the long position in the US floating rate note is also 10 million (delta equivalent): at the start of the cross-currency interest rate swap, its market is therefore zero. As both the long leg and the short leg are a position in a (notional) floating rate note, both positions are reported on line un ' '. This means that both the rho equivalent and the delta equivalent must be reported here in the third or eleventh column; the market of zero is stated in the second or tenth column. This is reported as follows in statement K201: Mandate Overlay Exp Government bonds Suppose that the exchange rates change to 80/ and $1.5/. We ignore interest rate movements as they play a minor role due to the long and short position in a (notional) floating rate note. In this case, the of the short position in the Japanese floating rate note increases to 12.5 million ( 1,000 million divided by 80/ ). The of the long position in the US floating rate note will decrease to Pension Funds Reporting Framework 23

24 million ($12.5 million divided by $1.5/ ). Due to the depreciation of the US dollar and the appreciation of the Japanese yen, the market of the cross-currency interest rate swap is million, the delta equivalent is million and the rho equivalent is million. This is reported as follows in statement K201: Mandate Overlay Exp Government bonds The second example describes the situation with the same swap, only now the interest rate paid over the five-year term is not the 6-month Japanese interest rate, but a fixed rate of 1 on the Japanese notional in exchange for the receipt of 6-month USD-LIBOR. In this case, assuming an exchange rate of $1.25/, the delta equivalent the long position in the (notional) US floating rate note which pays 6-month USD- LIBOR on $12.5 million remains unchanged at 10 million. Now, the rho equivalent is not the short position in a (notional) Japanese floating rate note, but a short position in a (notional) Japanese government bond with a fixed interest rate of 1. Assuming a flat Japanese yield curve at 1 and an exchange rate of 100/, the market of the government bond with a coupon of 1 on a notional of 1,000 million is 10 million. In this case, there is a (notional) short position in a Japanese government bond and this is also reported in the third or eleventh column on line un 'Government bonds'. The market of this swap is also zero at the start and is reported un ' ' on line since the market of ivatives is always reported on the same line as the delta equivalents. This is reported as follows in statement K201: Mandate Overlay Exp Government bonds Suppose once more that the exchange rates change to 80/ and $1.5/ and that the Japanese interest rate rises to 2. The of the (notional) long position in the US floating rate note and hence the delta equivalent will decrease to million due to the exchange rate movement. Owing to the higher Japanese interest rate, the of the (notional) short position in the Japanese government bond decreases from 1,000 million to 953 million. However, due to the appreciation of the Japanese yen versus the euro to 80/, the has increased to 11.9 million. The market of this crosscurrency interest rate swap will then be million ( million minus 11.9 million). This swap is reported as follows in statement K201: Mandate Overlay Exp Government bonds If the cross-currency interest rate swap involves the receipt of a fixed interest rate and the payment of a floating interest rate, the delta equivalents and the market of the cross-currency interest rate swaps are stated on line un 'Government bonds', and the rho equivalents are stated on line un ' '. This is because it involves the opposite situation of the example with a long position in a government bond that is financed with a floating rate note. Pension Funds Reporting Framework 24

25 The third example concerns a cross-currency interest rate swap involving a swap of two fixed interest rates over a five-year term. In this example, we assume the payment of 1 on the notional of 1,000 million and the receipt of 2 on a notional of $12.5 million. Assuming that the Japanese yield curve is flat at 1 and the US yield curve is flat at 2, the s of the (notional) fixed-rate government bonds would be, respectively, 1000 million and $12.5 million. Given the current exchange rates of 100/ and $1.25/, this corresponds to equal rho and delta equivalents of 10 million each. At the start of this swap, the market is therefore zero. As this involves both a long and a short position in a (notional) fixed-rate government bond, both the rho equivalent and the delta equivalent are stated in the third or eleventh column on line un 'Government bonds'. This is reported as follows in statement K201: Mandate Overlay Exp Government bonds Suppose now in this example that the exchange rates also change to 80/ and $1.5/, the Japanese interest rate rises to 2 and the US interest rate falls to 1. In this case the delta equivalent, the market of the (notional) US government bond, rises to $13.1 million, or 8.7 million at the new exchange rate. The rho equivalent, the market of the (notional) Japanese government bond, decreases to 953 million, or 11.9 million at the new exchange rate, due to the interest rate rise. The market of this position thus corresponds to million. As the delta equivalent and the rho equivalent are both stated in the third or eleventh column on line 5.1.1, the market of this crosscurrency interest rate swap is stated in both the second (or tenth) and third (or eleventh) columns: Mandate Overlay Exp Government bonds If one of the two legs of the cross-currency interest rate swaps is in euros, the relevant leg naturally need not be converted to euros. If both legs of the swap are in euros, this is a standard interest rate swap. Inflation swaps For K201 reporting purposes, we treat inflation swaps as a combination of an inflation-linked bond (ILB) and liquid ; if inflation protection is purchased, there is a long position in an ILB that is financed through a short position in government bonds. The (market) of the inflation swap s long leg, the position in the ILB, is reported on line 5.2 un 'Index-linked bonds' in the column with the delta equivalents. The rho equivalents of the inflation swaps (the swap s short leg) are reported on line un ' ' even though the position is equivalent to a short position in government bonds. The market of the inflation swaps is, of course, reported in the second or tenth column on line 5.2. Example 4: Inflation swaps As an example, we take a zero-coupon inflation swap where at the end of the 10-year term the realised inflation is received and a fixed notional is paid. This fixed notional is the interest accrual consisting of expected inflation (plus risk premium). In this case, we will assume 2 on a notional of 10 million. This means that we will pay 12.1 million after 10 years. Assuming a flat nominal yield curve of 4, the market of a zero coupon bond with a notional of 12.1 million is 8.2 million. The rho equivalent of the position in the inflation swap is thus million and is reported on the ' ' line. The delta equivalent is the synthetic long position in a zero-coupon ILB with a notional of 10 million. Its market is also equal to 8.2 million (the discounting of the notional of 10 million plus 2 interest Pension Funds Reporting Framework 25

26 at the flat yield curve of 4); at the start of the inflation swap the is zero. The market of this long position in the ILB is reported on the inflation-linked bonds line in the column with delta equivalents. The inflation swap s market of zero is reported in the second or tenth column in K201. This is reported as follows in statement K201 at the start of this inflation swap: Mandate Overlay Exp. 5.2 Index-linked bonds Suppose that the inflation forecast rises from 2 to 3 and that the real interest rate remains unchanged. The nominal interest rate will then rise to 5. There is little or no change in the of the long leg of the swap, the position in the ILB, as the real interest rate remains unchanged. The delta equivalent in this new situation therefore remains 8.2 million. The rho equivalent, the short position in the zero coupon government bond with a notional of 12.1 million, does change due to the increase in the nominal interest rate: it falls in to 7.5 million. Consequently, due to the risen inflation rate, the inflation swap s market has increased to = 0.7 million. This is reported as follows in statement K201(with the rho equivalent being reported on line un ' ' rather than on the 'Government bonds' line): Mandate Overlay Exp. 5.2 Index-linked bonds There are also other types of inflation swaps; these are reported in the same way as a short position in a corresponding (government) bond on line and a long position in a corresponding ILB. Credit default swaps (CDS) For K201 reporting purposes, we treat credit default swaps (CDS) as a combination of a risk-free floating rate bond and a (notional) floating rate bond for which protection has been purchased or sold. This is because a position in a risk-free bond and a written CDS have the same and risk as the unlying floating rate credit. CDSs are reported on one of the lines un the credits category on line 5.4. Incidentally, CDSs on government bonds are also reported on the credits line (5.4.1); only interest rate ivatives (incl. interest rate futures on interest rates and government bonds) are reported in columns 2 and 3 (or 10 and 11) un the government bonds class. The market of the CDS itself is reported in the second or tenth column on the relevant line un asset class 5.4. The rho equivalent is the of the risk-free bond which, in this case, is always equal to the notional of the CDS; after all, the riskfree floating rate bond is not subject to any interest rate risk. In this case, the closing entry is the delta equivalent: this represents the difference between the market of the CDS and the rho equivalent. This delta equivalent is the position in the (notional) credit with a floating rate and the same term as the CDS. This depends only on the difference between the credit spread as ived from the CDS at the start of the CDS and the credit spread as applicable to the (notional) credit on the reporting date. It should be noted that the above example ignores any counterparty risk and collateral issues. DNB expects the pension funds to control these risks and to make any material risk visible in statement K201. Example 5: Credit default swap As an example, we will take a purchased CDS with a notional of 10 million and a market of 0 at the start of the CDS. We enter the CDS market of 0 in statement K201 on line 5.4 in the second or tenth column. The rho equivalent on line is equal to the notional of 10 million. The delta equivalent is the difference between the market and the rho equivalent and is therefore 0-10 = Pension Funds Reporting Framework 26

27 - 10 million. The delta equivalent is negative, because we have purchased protection, reducing the exposure to credits. This is reported as follows in statement K201: Mandate Overlay Exp x Credits Suppose that the credit spread increases. In this case the of the purchased CDS rises to, for instance, 1 million. The rho equivalents remain unchanged at 10 million; after all, the notional of the contract does not change (just as the risk-free floating rate bond does not change in if the credit spread changes). Thus, the delta equivalent of this position is now 1-10 = - 9 million. This is now reported as follows in statement K201: Mandate Overlay Exp x Credits Share options The market of share put and call options is stated in the second or tenth column on line 3.1 un 'Mature markets' (unless these concern options on emerging market indices or shares; these are reported on line 3.2). The delta equivalent of share options is the product of the delta of the option position and the price of the unlying asset times the number of shares to which the option hol is entitled. The delta measures the sensitivity of the option price to changes in the unlying asset. The delta equivalent is actually the position in unlying shares which shows the same change in as the options in the case of a minor price change. The rho equivalent is once again the closing entry; the difference between the market of the options and the delta equivalents. Example 6: Share options Let us take as an example 1 million purchased put options on the S&P500 with an exercise price of 1000, while the current position of the S&P500 is The options have a 1-year term and a of 21 (depending on the selected model, assumptions, etc.). The total of this position thus works out at 2 million. According to the Black-Scholes model, the delta of this out-of-the-money put option amounts to This means that a 1 point increase in the index leads to a decrease of 0.15 in the put option s. The delta equivalent of the 1 million put options works out at 1 million = million. The rho equivalent now equals the difference between the market of the 1 million options and the delta equivalent: = million. This is reported as follows in statement K201: Mandate Overlay Exp Mature shares If the S&P500 falls to 1,000 points, the options rise in and the delta also increases in absolute terms, as the options become more in-the-money. The of one option rises to 99.48, bringing the total position to 99.5 million. After the stock index fall, the delta of a single option is The delta Pension Funds Reporting Framework 27

28 equivalent of the one million options is now 1 million = million. The rho equivalent is = million. This is reported as follows in statement K201: Mandate Overlay Exp Mature shares Commodities (and other) futures and forwards and total return swaps (TRS) Usually, an exposure to commodities is not entered into through direct investment in the actual commodities, but through the purchase of futures. Futures and forwards can also be used to assume exposure (temporary or otherwise) to other such as shares or fixed-interest securities. There are subtle differences between futures and forwards, which will be explained separately below. In most cases, depending on the contract conditions, total return swaps (TRS) are reported in statement K201 in the same way as forwards. This is why the reporting of total return swaps is not explained separately here. Forwards The reporting of forwards in K201 also closely corresponds with the reporting of an interest rate swap, the only difference being that the position in the fixed-rate bond is replaced by a position in the unlying commodity. The market of the commodities forward contract is stated on line 7.1 in the second or tenth column (unless the forwards are on other, in which case they are reported on the relevant line). The delta equivalent of such a position is equal to the spot price multiplied by the notional of the contract. The rho equivalent is the difference between the market and the delta equivalent. This corresponds with the notional s discounted multiplied by the forward contract s exercise price. A forward contract, therefore, is basically a purchase of the unlying commodities in exchange for a fixed-rate loan equal to the exercise price. This is therefore analogous to receiver swaps where a floating-rate short-term loan is entered into (floating leg) to finance the purchase of a bond with a longer term and a fixed interest rate (fixed leg). Example 7: Forwards Let us assume that we wish to invest 15 million in gold. For this purpose, we release 15 million in cash, part of which is used to fulfil the collateral obligations. If the remain of the 15 million that is not needed to meet the margin requirements is invested in other, this results in leverage since an exposure of 15 million to gold has been built up with less than 15 million. For the total exposure we take out 100 forward contracts for 100 troy ounces per contract. When the contract is entered into, the forward price of gold is 1,575 per troy ounce and the spot price is 1,500. The initial market is, of course, zero and this is stated in the second column on line 7.1 un 'Commodities'. The delta equivalents of this position are 100 contracts 1,500 (spot price) 100, which is equal to the 15 million exposure. This is also reported on line 7.1, but now in the third or eleventh column. The rho equivalent in column three or eleven on line un ' ' is the difference between the market and the delta equivalents: 0-15 = - 15 million. The cash that is held for the contracts, which also jointly total 15 million, is reported in the first column of line un ' '. If the remaining cash is not kept in hand, but is invested (leading to leverage), this investment is reported un the asset class in which the investment is made. The position in gold is reported as follows in statement K201: Mandate Overlay Exp Commodities Suppose that the gold price has increased by 10 to 1,650, and that the forward s price has increased to 1,700 (apart from the increase in the gold price, the interest rate has also fallen). The of a single forward contract is now 12,132. The 100 contracts now have an aggregate market of 1.2 Pension Funds Reporting Framework 28

29 million, which is reported in the second or tenth column on line 7.1. The delta equivalents on the same line in the third or eleventh column are now 100 contracts 1, is 16.5 million exposure. The rho equivalent on line is the difference between the market and the delta equivalents: = million. Due to the interest rate movement, the of the loan used to purchase exposure to gold has also changed. This is reported as follows in statement K201: Mandate Overlay Exp Commodities Futures The treatment of futures is analogous to the treatment of the forwards, save for a few minor differences caused by the daily settlement of futures contracts. The most important consequence is that the spot price plays no role for reporting purposes. The delta exposure of the futures position is the notional multiplied by the futures price. As changes in the futures price are settled directly via the margin account un 'Short-term claims on banks', the market of the futures position is always zero. The rho equivalent is thus always equal to minus the delta equivalent. If there is no question of leverage, the short-term claims on banks are always equal to the delta equivalents; the of the futures contracts is fully reflected in the cash position un short-term claims on banks. Example 8: Futures If we want to build a 15 million exposure to gold via futures at a future price of 1,500 (the spot price is not important), we enter into 100 futures contracts for 100 troy ounces per contract. The 15 million cash released for this purpose is reported un 'Short-term claims on banks', unless we do not exclusively use this amount to meet the margin requirement but also invest a portion in other. This results in leverage and the investment of the cash must be shown un the relevant asset class. The initial market is, of course, zero, which is stated in the second or tenth column on line 7.1 un 'Commodities'. The delta equivalents of this position are 100 contracts 1,500 (futures price) 100 and are equal to the 15 million exposure. The rho equivalent in column three or eleven on line un ' ' is the difference between the market and the delta equivalents: 0-15 = - 15 million. The cash in the margin account and the remaining cash that is held for the contracts, also together amounting to 15 million, are reported in the first or ninth column on line un 'Other liquid '. The position in gold is reported as follows in statement K201: Mandate Overlay Exp Commodities Suppose that the futures price has increased by 10 to The aggregate of the 100 contracts has now increased by 1.5 million. This increase in is added to the margin account and is thus reported on line un ' '. Together with the existing cash amount of 15 million, the total comes to 16.5 million. The contract s market is thus directly settled so that the market of the commodities on line 7.1 in the second or tenth column remains zero. The delta equivalents on the same line in the third or eleventh column are now 100 contracts 1, , which gives an exposure of 16.5 million. The rho equivalent on line is the difference between the market and the delta equivalents: = million. This is reported as follows in statement K201: Pension Funds Reporting Framework 29

30 Mandate Overlay Exp Commodities Suppose that in the previous examples the margin requirement is 25 of the notional of the contracts and the other 75 of the cash or the cash collateral is reinvested. This reinvestment must also be reported as a separate investment on the line of the relevant asset class. As an example, we reinvest the 75 in standard corporate bonds. In that case, we report 25 of the 15 million as margin requirement in the first column un 'Short-term claims on banks' and the remain of the 15 million in the first column un 'Credits'. The delta and rho equivalents of the forwards or the futures remain unchanged at 15 million. This reinvestment is reported as follows in statement K201: Mandate Overlay Exp corporates/financials Commodities This clearly highlights the balance sheet increase resulting from the reinvestment, as the exposures of the investment of 15 million come to a total exposure of 26.3 million; 11.3 million exposure to credits plus 15 million exposure to commodities. Structured notes A structured note often entails the same kind of risk as a bond and a ivative. Let us take, for example, a structured note with a notional of 10 million concluded with an investment bank, which on the maturity date pays out the notional multiplied by the return on a commodity index; the of the structured note is covered by collateral by the investment bank. Until maturity, the investment bank pays 3 percent annually on the principal. This structured note is a combination of a bond with a notional of 10 million issued by the investment bank and a commodity forward with a notional of 10 million. The market of the (comparable) bond is 9 million and that of the commodity forward is initially zero. The total of the structured note, less the of the ivative, is thus initially 9 million and is reported on line 8.4 in column 1; however, the exposure is to a covered bond and is reported on line in column 4. This is reported as follows in statement K201: Mandate Overlay Exp Covered bonds Commodities Structured notes 9 0 Suppose that the credit spread of the investment bank increases and the market of the (comparable) bond falls to 8 million. Suppose also that the commodity index has risen by 50 percent, causing the market of the forward to increase to 5 million. This is reported in the following way: Pension Funds Reporting Framework 30

31 Mandate Overlay Exp Covered bonds Commodities Structured notes 8 0 Question 10.1: Currency ivatives In the case of currency ivatives both the delta and the rho equivalents are reported on line 10.1 un 'Currency overlay'. The market of the currency ivatives is reported in column two or ten. As both the delta and rho equivalents are stated on the same line in the third or eleventh column, the amount in this column is equal to the market of the currency ivatives in the second or tenth column. The reporting of currency ivatives in statement K201 is therefore entirely independent of the term, currency, notional etc.; only the market needs to be known. This information is necessary, however, for the application of the currency shocks in statement K204. If the market of the currency ivatives of the mandate investments (or the currency overlay at portfolio level) is 10 million, this is reported as follows in statement K201: Mandate Overlay Exp Currency overlay Exposure (columns 4 & 12) Columns four and twelve concern the total exposure of the investments. In many cases this is the sum of, respectively, columns one and three or columns nine and eleven, because the total exposure of the investments on a line is formed by the market excluding ivatives and delta sensitivities of investments on the line in question. The additional exposure resulting from leverage due to loans raised within mandate or overlay investments must also be reported. Here too, the look-through principle applies. Example of exposure We describe two examples, one involving an indirect real estate investment and the other an investment in a private equity fund of funds. Suppose we hold 50 million worth of units in a real estate fund. The real estate fund raises a 50 million loan from an external financier. The total of the holding remains unchanged, but the sensitivity of its has doubled to 100 million. The remain of 450 million is invested in government bonds. The market of the real estate investment of 50 million is reported in column one on line 2.3 un 'Indirect unquoted real estate'. The mandate s total exposure to real estate amounts to 100 million; this is reported on the same line in column four. The additional exposure of 50 million as a consequence of the external financing in the mandate is reported as minus 50 million in column four on line un ' '. This is reported as follows in statement K201: Pension Funds Reporting Framework 31

32 Mandate investments Weightings Overlay investments Total investments 2.3. x Ind. unl. real estate Government bonds Exp. Actual (min) (max) Exp Total Interest rate hedge The other example concerns a private equity fund of funds investment worth 50 million. By means of a loan of 50 million, this fund s available capital for investment in private equity funds is increased to 100 million. The private equity fund of funds then commits 25 million to four private equity funds. Two of these private equity funds, in turn, also contract loans of 25 million each. Together with the initial capital of 50 million, this leads to a total private equity exposure of 150 million. In other words, there is a total exposure of 100 million due to external financing. Note that, as with exchange-listed shares, the leverage within the companies is included in the total exposure. The leverage within the companies may give rise to additional risks. This private equity fund of funds investment must be reported as follows in K201: Mandate investments Weightings Overlay investments Total investments Exp. Actual (min) (max) Private equity Government bonds Total Interest rate hedge Exp. Exp. Exp. Standard weightings and bandwidths (columns 6-8 (or 14-16)) The standard weightings and the lower and upper limits of these standard weightings are reported in columns six, seven and eight (and 14,15 and 16) respectively. These standard weightings and limits must correspond with the standard weightings as applied in the Actuarial and Technical Business Report (Actuariële en bedrijfstechnische nota or ABTN). To enter the standard weightings and bandwidths, it is necessary to have a clear picture of the strategic investment policy and the existing limits within mandates and fund investments. If certain investments in asset sub-classes are not excluded in the fund conditions or in the description of the mandate in the capital management agreement (or it has been explicitly stated that investment may only be made in a given sub-class), the upper and lower limits of the class concerned must reflect the weighting margins for allocations to these sub-classes. Suppose that a pension fund allocates 30 percent to shares worldwide, in both emerging and mature markets. The bandwidth for the total allocation to shares is plus and minus 3 percent. However, there is no explicit limit on the investments in mature and emerging markets, so that the lower and upper limits for both the emerging and mature markets subclasses are 0 and 33 percent. If a mandate or fund investment is spread across several asset sub-classes, where standard weightings and limits are available for the sub-classes, these are translated into standard weightings and bandwidths for the sub-classes in statement K201. As an example, we will take a fund that allocates 50 to fixed-interest securities and 50 to mature market shares of a total portfolio of 200 million. The bandwidths for these standard weightings are plus and minus 10, i.e. between 40 and 60. The Pension Funds Reporting Framework 32

33 fixed-interest securities mandate has a standard weighting of 60 government bonds and 40 credits. The mandate includes bandwidths of plus or minus 10 percentage points for investments in fixed-interest. For the lower limit this means that of the minimum allocation of 40 at least 50 is allocated to government bonds and at least 30 is allocated to credits. This means a lower limit for investments in government bonds of 40 times 50, which is 20. By the same token, the lower limit for investments in credits results in 12. The upper limit of the allocation to government bonds comes out at 42: 60 allocation to fixed-interest securities times 70 allocation to government bonds within the mandate. If this calculation is applied to credits, the upper limit for investments in credits amounts to 30. This is reported as follows in statement K201: Mandate investments Weightings Overlay investments Total investments Exp. Actual (min) (max) Mature shares Total shares Government x bonds 5.4. Credits x 5.6 Total FIS Total Interest rate hedge If no explicit limits have been set for the standard weightings of 60 government bonds and 40 credits within the fixed-interest mandate, an allocation of 0 or 100 to credits or government bonds will be possible within the mandate. This option in the strategic investment policy should be reflected in the statements, i.e. as the lower limit of investments in government bonds of 0 (40 allocation to fixed-interest securities and a minimum allocation of 0 within this allocation) and for the same reason a lower limit of 0 to credits. The upper limit for government bonds and credits amounts to 60 in this situation. In the absence of limits within the mandate, this is reported as follows in statement K201: Mandate investments Weightings Overlay investments Total investments Exp. Actual (min) (max) Mature shares Total shares Government x bonds 5.4. Credits x 5.6 Total FIS Total Interest rate hedge Actual weightings that fall outside the reported bandwidths must be explained in the relevant text field. If no standard weightings and limits are available for the other asset classes on lines 8.1 to 8.7, these naturally need not be entered. The ABTN must always sufficiently explain the investments (including the standard weightings and the upper and lower limits). Based on this information, it should be possible to establish the breakdown of the investments and standard weightings as well as the upper and lower limits in K201. Exp. Exp. Exp. Exp. Pension Funds Reporting Framework 33

34 A buy-and-hold strategy may be applied to the portfolio (or part of it) whereby the pension fund has decided not to re-balance the allocation. This may be the case, for example, if there are less liquid investments, such as private equity, hedge funds and real estate, which do not lend themselves to quick buying and selling. A buy-and-hold strategy may, however, also be applied to other liquid asset classes or to the entire balance sheet. If a buy-and-hold strategy is applied, the lower and upper limits equal the standard weightings. Let us take for example a pension fund with an allocation of 20 to indirect nonlisted real estate, 30 to shares, and 50 to fixed-interest securities of total investments of 100 million. The strategic investment policy requires that the 20 million allocation to real estate is not actively expanded or reduced. The strategic investment policy also dictates that the allocation to fixed-interest, variable-yield securities, shares and real estate has a bandwidth of 10 percentage points. This implies a limit on share investments of a minimum of 20 and a maximum of 40 as the 20 allocation to real estate is fixed. This is reported as follows in statement K201: Mandate investments Weightings Overlay investments Total investments Exp. Actual (min) (max) Ind. unl. real estate Mature shares x Government bonds Total Interest rate hedge Suppose that the of the real-estate investments in the above example climbs to 30 million, the of investments in shares increases to 40 million, and that of investments in government bonds remains at 50 million. The standard weighting for real estate would then amount to 25: 30 million of total investments of 120 million. The standard weighting for shares would also amount to 25: 50 allocation to variable-yield securities less 25 standard weighting for real estate. The upper and lower limits of the investments in shares equal 15 and 35 respectively in or to limit the allocation to variable-yield securities to between 40 and 60. After these strategy changes, this is reported as follows in statement K201: Exp. Exp. Mandate investments Weightings Overlay investments Total investments Exp. Actual (min) (max) Ind. unl. real estate Mature shares x Government bonds Total Interest rate hedge If, contrary to the strategic investment policy, the pension fund in the above example decides to buy 10 million extra real estate financed by the sale of 10 million government bonds, the standard weightings and limits will remain unchanged. As we know, these reflect the strategic investment policy that should have been adhered to. The fund's deviation from its investment strategy is reported as follows in statement K201: Exp. Exp. Pension Funds Reporting Framework 34

35 Mandate investments Weightings Overlay investments Total investments Exp. Actual (min) (max) Ind. unl. real estate Mature shares x Government bonds Total Interest rate hedge The actual weightings are determined by dividing the total exposure in column four by the sum of the total exposures in column four on line 11. If the standard weightings in the ABTN are not based on the total exposures as reported in statement K201, the actual weightings may deviate from the reported standard weightings due to leverage. This deviation must also be explained in the Explanation field. For internal purposes, DNB applies both the actual weighting as made visible in K201 and the actual weighting excluding the leverage effects of additional loans. Products held to hedge interest rate risk As an example for completion of line 11.1, interest rate hedge, we will take a pension fund that invests 20 of its 500 million invested in shares, 50 in government bonds, 10 in mortgages and 20 in corporate bonds. The 250 million exposure to government bonds is achieved by buying 150 million in government bonds with 100 million held in cash, and entering into 100 million exposure in interest rate swaps. The 100 million held in cash for the exposure to government bonds by means of swaps is reported in column 1 on line. The full 300 million exposure to government bonds and mortgages is held as a hedge against interest rate risk (e.g. in the match portfolio). The investments in corporate bonds consist of two mandates; one mandate of 50 million contributes to interest rate hedging (in the match portfolio) and the other is not held for hedging purposes (but falls within the return portfolio for instance). This means that the market of mandate investments held for interest rate hedging purposes is 250 million ( 150 million government bonds, 50 million mortgages and 50 million credits). The delta equivalent of 100 million of the swaps for the exposure to government bonds also contributes to the interest rate hedge and is added up on line This brings the total exposure of the mandate investments held for interest rate hedging purposes to 350 million. The investments on line are not included in the determination of products held for interest rate hedging purposes. In addition, the fund has entered into 150 million in interest rate swaps in the overlay to increase its interest rate hedge. The resulting 150 million exposure fully counts as interest rate hedge and is reported on line In the overlay investments, the exposures on line are not added to the products held for interest rate hedging purposes. Mandate investments Weightings Overlay investments Total investments Exp. Actual (min) (max) Mature shares Government x bonds 5.3. Mortgage loans x 5.4 Credits Total Interest rate hedge The examples on the breakdown of investments into mandate and overlay in the next section will show you how to complete line 11.1 on interest rate hedging in other commonplace situations. Exp. Exp. Mv Exp. Exp. Pension Funds Reporting Framework 35

36 The difference between mandate and overlay investments One of the purposes of statement K201 is to find out to what extent the strategic investment policy is actually implemented. To this end, the actual allocation is compared with the strategic standard weightings in K201. This actual allocation in columns 5 and 13 in K201 is based on the exposure of the investments, including ivatives. Due to the exposure of the ivatives used in the overlay, for instance to hedge the interest rate and/or share risk, the actual weighting may deviate from the standard weightings if (i) the strategic standard weightings are based on the market s of the investments and (ii) the standard weightings are exclusive of the market and/or exposure of the overlay investments. In the case of standard weightings based on exposure, all investments are to be reported un mandate investments. When determining whether investments must be reported un mandate or overlay investments, it is important to decide whether the strategic standard corresponds with the actual exposure as reflected in the implementation of the strategic investment policy. The market of an investment in LDI-type funds or mandates usually does not correspond with the exposure; this is due to the extra exposure to hedge the interest rate risk. Such mandates are therefore reported un overlay investments. If a fund or mandate contains loans to generate extra exposure, as occurs with real estate and private equity, these still fall within mandate investments. Although in the case of this form of leverage, the actual weighting may overstep the strategic bandwidth, DNB will in such cases assess the implementation of the investment policy on the basis of the market of the investments; nonetheless, DNB expects pension funds to take account of the leverage inherent in these investments. The examples in the following sub-sections describe how the choice between mandate and overlay investments must be made in the most common situations. The starting point in the examples is a pension fund with invested of 200 million. According to investment strategy, the asset mix must be 50 shares and 50 government bonds. The investments are rebalanced as soon as the actual weighting deviates more than 5 from the strategic allocation. No overlay investments If the pension fund makes no use of overlay investments, columns 9 to 20 remain hidden. The investments of the fund in the example, which has no overlay investments and invests 50 of the of 200 million in mature market shares and the other 50 in government bonds, are reported as follows: Mandate investments Weightings Overlay investments Total investments Exp. Actual (min) (max) Mature shares x Government bonds Total Interest rate hedge No overlay investments; ivatives in the mandate investments Suppose that the pension fund in the above example implements 50 of the exposure to government bonds via interest rate swaps. In this case 50 million is directly invested in government bonds and 50 million of cash is converted via interest rate swaps into exposure to government bonds. First of all, question 1.1 can be answered with no, as there are no overlay investments. Columns 9 to 20 remain hidden. The 50 million in cash is reported in column 1 on line un ' '. The interest rate swaps generally have an initial market of 0 million. This is stated in column 2 on line 5.1 un 'Government bonds'. The 50 million exposure of the interest rate swaps is reported in column 3 on line 5.1 un 'Government bonds'. The rho equivalent of the interest rate swaps of - 50 million is reported in column 3 on line un ' '. The full exposure to government bonds through both the interest rate swaps and the physical government bonds is consied in determining the interest rate hedge, whereas the investments on line un ' ' are not included in the interest rate hedge. This is reported as follows in statement K201: Exp. Exp. Pension Funds Reporting Framework 36

37 Mandate investments Weightings Overlay investments Total investments Exp. Actual (min) (max) Mature shares Government x bonds Total Interest rate hedge LDI-type investments Pension funds are able to adjust their interest rate hedge (partly or wholly) via LDI-type mandates. Suppose the pension fund from the previous examples opts, alongside an allocation of 25 to government bonds, for an LDI mandate with a equal to 25 of the balance sheet. This LDI mandate provides a 100 interest rate hedge, taking account of the 25 allocation to government bonds. The 25 allocation to government bonds may vary between 20 and 30 of the balance sheet. The LDI mandate has exposure above 25 in or to hedge 100 of the interest rate risk. Therefore the investments of the LDI mandate come un overlay investments. The LDI mandate is made up of 25 million in government bonds and 25 million in cash. The cash is used to achieve a 100 interest rate hedge through interest rate swaps. The LDI mandate enters into interest rate swaps with a notional of 125 million and an initial market of 0 million. In this case, the question of whether there are overlay investments is answered in the affirmative. All these investments are reported as follows in statement K201: Mandate investments Exp. Actual Weightings (min) (max) Overlay investments Exp. Exp. Actual Mv Weightings (min) Exp. (max) Mature shares Government x bonds Total Interest rate hedge Interest rate swap overlay Suppose that, apart from any ivatives in the mandate investments, the pension fund is also striving, from its initial position, for a total interest rate hedge of 75. For this purpose it uses interest rate swaps with a notional of 50 million, an initial market of 0, a delta equivalent of 50 million and (thus) a rho equivalent of minus 50 million. If the market of the interest rate swaps exceeds plus or minus 5 percent of the investments, the swap overlay is adjusted in or to limit, for example, the counterparty risk. First of all, the question about the overlay investments is answered in the affirmative. Columns nine to twelve now become available for completion. This situation is reported as follows in statement K201: Pension Funds Reporting Framework 37

38 Mandate investments Exp. Actual Weightings (min) (max) Overlay investments Exp. Actual Weightings (min) (max) Mature shares Government x bonds Total Interest rate hedge Match and return portfolio If the investment policy includes a match and a return portfolio, match portfolios should emphatically not be reported in full detail un overlay investments. Only the LDI-type investments in the match portfolio and the overlay are reported un overlay. Each LDI mandate (within the match portfolio) that uses leverage is reported un overlay. As an example for completing a match and return portfolio we will take a pension fund with a match portfolio equalling 80 of the technical provisions with a bandwidth of plus and minus 10 percentage points. Half of this match portfolio consists of government bonds and the other half of an LDI mandate. The return portfolio consists of shares only. Where invested total 120 million, technical provisions of 100 million and consequently a funding ratio of 120, this means a standard weighting of 33 government bonds; 50 of 80 of 120 (the funding ratio is used in or to translate the 80 relative to the technical provisions into a percentage relative to total investments). Similarly, the allocation to the LDI mandate also works out at 33 relative to total investments. The return portfolio consists of the remain of investments after the allocation to the match portfolio: 33 allocation to shares. There is no leverage within the LDI mandate, but 40 million in cash combined with 40 million in interest swaps is used to increase interest rate sensitivity. In this case, the match and return portfolios can both be reported in the normal way un mandate investments in statement K201: Mandate investments Exp. Actual Weightings (min) (max) Overlay investments Exp. Actual Weightings (min) (max) Mature shares Government x bonds Total Interest rate hedge If the LDI mandate within the match portfolio does allow leverage, for instance to achieve 100 interest rate coverage by entering into interest swaps with a notional of 60 million, only the LDI mandate is reported un overlay. The standard weighting of the government bonds within the match portfolio and the standard weighting of the shares in the return portfolio are adjusted for the fact that the 40 million LDI-investments of the total of 120 million is no longer part of the mandate investments. The standard weighting for shares amounts to 50; 33 of 67 (67 of total investments concerns mandate investments, since 33, 40 million of total investments of 120 million, is reported un overlay). The standard weighting of government bonds also amounts to 50; 33 of 67. In this case, the match and return portfolios are reported as follows in statement K201: Pension Funds Reporting Framework 38

39 Mandate investments Exp. Actual Weightings (min) (max) Overlay investments Exp. Actual Weightings (min) (max) Mature shares Government x bonds Total Interest rate hedge Standard weightings on exposure basis An exception is the case where the standard weightings are based not on the market of the investments, but on their exposure. In this case question 1.1. is answered in the negative and columns nine to twelve remain hidden. Let us take as an example a pension fund that is seeking an exposure to fixed-interest securities (government bonds) of 75 of the investments and an exposure to shares of 50 of the total investments. Both allocations have a bandwidth of plus or minus 5. The additional exposure to fixed-interest securities is implemented through interest rate swaps. In concrete terms, this means that there are 100 million of shares and 100 million of government bonds on the balance sheet. In addition, the pension fund has entered into interest rate swaps with a notional of 50 million and an initial market of 0 million so as to increase the exposure to fixed-interest securities to 75 of the total investments. The standard weightings in this situation add up to 125; the surplus of 25 is reported as minus 25 in column 6, standard weighting, on line un ' '. The actual and standard weightings of the other liquid on line indicate the implicit extension of the balance sheet. This is reported as follows in statement K201: Mandate investments Exp. Actual Weightings (min) (max) Overlay investments Exp. Actual Weightings (min) (max) Mature shares Government x bonds Total Interest rate hedge Mandate investments Weightings Overlay investments Total investments Exp. Actual (min) (max) Mature shares Government bonds Total Interest rate hedge Exp. Mv Exp. Pension Funds Reporting Framework 39

40 Currency overlay The currency hedge within the mandate and fund investments is reported on line 10.1 in columns one to four. The investments for hedging the (residual) currency risk at balance sheet level are reported on line 10.1 in the columns nine to twelve un Overlay investments. Question 1.1 must therefore also be answered in the affirmative if the fund only has a currency overlay. Pension Funds Reporting Framework 40

41 K201RD Investments for members' risk To be completed by: All pension funds with technical provisions for the members' risk Frequency: Quarterly Last change to statement: First quarter of 2015 Last change to instruction: 1 January 2015 Introduction This form is used by the pension fund to provide an overview of the investments held for the members' risk. The investments are d at market. Here too, the look-through principle applies. The overview must report the market of the investment (column 1), the market of ivatives (column 2), the delta and rho equivalents of the ivatives (column 3) and the exposure of the investment (column 4). For a more detailed explanation of these four columns, reference should be made to the text above on statement K201, 'Investments for the fund's risk'. Breakdown The investments for the members' risk are broken down into eight asset classes. Question 1 Real estate investments In response to question 1, the pension fund states the of the real estate investments. This concerns both indirect and direct real estate. Question 2 Share investments Question 2 shows the of the share investments. Question 3 Alternative investments Alternative investments mean investments in private equity, micro-financing and infrastructure. Question 4 Fixed-interest securities Fixed-interest securities must be reported inclusive of accrued interest. Question 5 Hedge funds The investments in hedge funds are reported in the answer to question 5. Unlike other asset classes, the look-through principle does not have to be applied here. Question 6 Commodities The investments in commodities will consist mainly of investments in commodities ivatives. Their is expressed in the second column. Direct investments, for example in precious metals, will be reported mainly in the first column. Question 7 Other investments Investments which cannot be attributed to other asset classes are reported un 'Other investments'. Question 8 Currency overlay Question 8 shows the of the currency overlay, meaning the of the currency ivatives. Pension Funds Reporting Framework

42 K202 Investments for the fund's risk / Currency To be completed by: All pension funds with technical provisions for the pension fund's risk Frequency: Quarterly Last change to statement: First quarter of 2015 Last change to instruction: 1 January 2015 Questions , exclusive of ivatives This statement relates solely to investments for the fund's risk. To gauge the possible exposure to currency risk, the of the investments should be reported as broken down by currency units. This concerns the of the investments excluding any ivatives. The total investments of both the mandate and the overlay investments, excluding ivatives, must be broken down by euro and noneuro investments for the various main asset classes, for which purpose a distinction is made between the following currencies: euro, US dollar, pound sterling and Japanese yen. The rest of the non-euro investments are reported un 'Other'. The non-euro investments are reported in euros at the exchange rate applicable at the end of the quarter. The sum of the euro and non-euro investments, excluding ivatives, must correspond for each main asset class with the totals per main asset class in statement K201, column 17. Direct investments in physical commodities, which have been reported in statement K201 in the first column, are always reported as euro investments. Questions 2-4: Investments sensitive to exchange rate fluctuations Question 2 reports on the currency hedging by listing the notionals of the ivatives used to hedge the currency risk, broken down by the various currencies mentioned in question 1. This should be aligned with the notional of the currency ivatives also reported in statement K204. This alignment should be explained in the text field at question 5. If one or both legs of a currency ivative relate to the US dollar, the pound sterling or the Japanese yen, the in euros of the notional on the reporting date of these ivatives is reported as negative for the leg in which there is a long position (the leg currency which benefits from an appreciation of this currency in relation to the euro) and as positive on the other leg (the leg currency which benefits from a depreciation of this currency in relation to the euro). On balance, this adds up to a notional of zero in this statement and for these ivatives, in accordance with the reporting of the notional of such ivatives in statement K204. Where neither leg of a currency ivative relates to the euro, the US dollar, the pound sterling or the Japanese yen, the market s of such ivatives are reported in column 5 un Other currencies. In fact, the of the notionals of both legs of these ivatives is therefore reported in euros on the reporting date; as both legs (currencies) are reported in the same column, only the balance the market is visible. The strategic currency hedging rate as laid down in the policy is requested in question 4.1. Question 5: Notes This field can be used to provide clarification regarding the currency breakdown. Pension Funds Reporting Framework 42

43 K203 Investments for the fund's risk, fixed-interest securities To be completed by: All pension funds with technical provisions for the pension fund's risk Frequency: Quarterly Last change to statement: First quarter of 2015 Last change to instruction: 1 January 2015 Introduction This quarterly statement provides an itemisation of the fixed-interest securities portfolio by risk type. This is required only for fixed-interest securities for the fund s risk (both mandate and overlay investments). Of these investments, the creditworthiness, spread duration and modified/partial durations should be reported. This enables DNB: - to estimate the creditworthiness of the securities; - to determine the sensitivity of the market to changes in the spread; - to determine the sensitivity of the market of the entire portfolio to changes in the risk-free interest rate term structure. Besides the modified duration, partial durations must also be reported. Using this information DNB can gauge the impact of non-parallel changes in the interest rate term structure. Notes Question 1: Credit rating class This table should report the market s per credit rating class. These should be broken down by asset class, in accordance with the breakdown used in statement K201 (see instructions at K201). The credit rating classes are based on the classes defined by the major credit rating agencies (Moody's, S&P and Fitch). The K203 statement provides a breakdown based on the credit ratings AAA, AA, A, BBB, lower than BBB and No rating. The following table lists the credit ratings of the major credit rating agencies as these should be reported by the fund. If the rating of the investment is not known, the pension fund must make an adequate estimate, where possible. Only if this is not possible may the investment be reported in the No rating category. Liquid also need to be reported in the No rating category. Table in Moody s S&P Fitch statements AAA Aaa AAA AAA AA Aa1 Aa2 Aa3 AA+ AA AA- AA+ AA AA- A BBB A1 A2 A3 Baa1 Baa2 Baa3 A+ A A- BBB+ BBB BBB- A+ A A- BBB+ BBB BBB- Lower than BBB Ba1 and lower BB+ and lower BB+ and lower No rating The total sums (column 7) should correspond with the amounts reported in the total market column (exclusive of ivatives) in response to question 5 of K201. Question 2: Notes on question 1 Particulars of the securities reported un question 1 should be explained in response to this question. If applicable, the following amounts should in any event be explained: - The amounts reported un the 'No rating' category in question 1. - The amounts for which an estimate has been made of the credit rating because no credit rating is known, and how this estimate has been made. Question 3: Spread durations This table should report the spread duration per credit rating class. The spread duration reflects the percentage change of fixed-interest securities in the case of a 100-basis point movement in the credit spread. The spread duration is expressed in years (to one decimal place). The spread duration must be calculated as the change as a result of a 1-basis point narrowing/widening of the spread and must subsequently be scaled up to 100 basis points (by multiplying by 100). The following formula may be used to calculate the duration based on 1 basis point: Pension Funds Reporting Framework 43

44 D spread P 1 P 1bp P P s P 2 1 1bp 100 Where P P 1bp is the current market of fixed-interest securities is the market of fixed-interest securities as a result of a 1-basis point widening or narrowing of the spread. Normally speaking, the spread duration for fixed-rate securities equals the modified duration of the security. For securities with a variable rate component, the spread duration differs from the modified duration. Cash positions, which do not have a spread duration, should be reported on line 3.6. Question 4: Modified duration The modified duration indicates the change in of the fixed-interest securities mandate and overlay portfolio resulting from a parallel change in the interest rate term structure of 1 percentage point. The modified duration as at the end of the quarter must be reported only for fixed-interest securities excluding ivatives (first column), fixed-interest securities including ivatives (second column) and total investments including ivatives (third column). The modified duration is represented in years (to one decimal place). The modified duration indicates the interest rate sensitivity to minor changes in the yield curve; it is the relative change of the fixed-interest securities if the yield curve changes by one basis point multiplied by 100. Question 4 expressly does not ask to shock the yield curve by 100 basis points. For the calculation of the duration, not only the euro interest rates but also all non-euro yield curves are adjusted by one basis point. All products, regardless of their rating or the level of their credit spread, are taken into account in calculating the duration (i.e. also high-yield bonds and emerging market debt). DNB makes use of the modified durations to gain insight into the duration gap between the and liabilities. Here, the modified duration of the fixed-interest securities portfolio, excluding ivatives, is the percentage change of the fixed-interest securities portfolios. 1 1 FIS FIS 1bp FIS 1 bp MDFIS (excludingivatives) 100 FIS s FIS 2 The modified duration of the fixed-interest securities portfolio is the change in the of the fixedinterest securities and interest rate ivatives, divided by the sum of the market s of the fixedinterest securities and interest rate ivatives (IRDer): MD FIS (includingivatives) 1 1 FIS IRDer FIS IRDer 1bp FIS IRDer 1 s 2 FIS IRDer FIS IRDer bp 100 The modified duration of the total investments, including ivatives, is not only reflected in the market of the fixed-interest securities portfolio but affects the entire balance sheet. This indicates the change in of the total investments for the fund s risk, including ivatives (as reported on line 1.1 un 'Investments for risk of pension fund' in statement K101) which results from a parallel change of 1 basis point in the yield curve multiplied by 100. The formula for determining the modified duration of the total investments, including ivatives, is as follows MD Total Investments 1 1 TI TI 1bp TI 1 s 2 TI TI bp 100 The duration of the total investments in relation to the duration of the fixed-interest securities, including ivatives, is in keeping with the relationship between the of the fixed-interest securities and the total investments. Pension Funds Reporting Framework 44

45 Question 5: Partial duration The partial duration sheds light on the interest rate sensitivity of the total portfolio (including ivatives) in the case of non-parallel movements of the interest rate term structure. For this purpose, the pension fund should report the partial duration per maturity segment. The number and size of the maturity segments have not been determined in advance by DNB. The fund is thus given the possibility of basing them on its own risk reports. However, the minimum number of maturity segments is 8 and the maximum 25. In addition, the fund is free to determine the size of each maturity segment. The limit s of the maturity segments are reported in the first and second columns. These limit s should be reported in years (rounded to half years). The limit s for 'maturity from' (first column) should directly coincide with the limit s for 'maturity to' of the previous maturity segment. This does not apply to the first maturity segment. In this case the 'maturity from' should be zero. In addition, the 'maturity to' for the last maturity segment should be at least equal to the timing of the final cash flow. The pension fund should complete only as many lines as it needs for the maturity segments it has defined. The partial duration should be calculated as the change in as a consequence of a decrease or increase in the spread of one basis point per maturity segment. This should then be scaled up to 100 basis points (by multiplying by 100) and reported to one decimal place. The following formula may be used to calculate the partial duration per maturity segment based on 1 basis point: Partial duration i = 1 P = 1 P P fi 1bp f i +1bp P f i P 2 x100 Where P = Current market of current investments f i = Yield curve in maturity segment i P fi +1bp = of total investments after 1 bp widening in maturity segment i P fi 1bp = of total investments after 1 bp narrowing in maturity segment i The sum of the partial durations of all maturity segments should coincide with the modified duration for the entire portfolio reported un question 4 (column 3). Below is an example of a report of a 10-year government bond with a 3 annual coupon payment amid a 2 flat yield curve: 1. Determination of maturity segments: First, key points in the interest rate term structure are selected ('key rates'): 1y, 2y, 5y, 10y, 15y, 20y, 25y, 30+. Maturity segments are then determined on the basis of these key rates (see below). Pension Funds Reporting Framework 45

46 2. Calculation of the 1 bp partial durations of the portfolio for each maturity segment, using the following formulas for maturity segments 1 8: Partial duration 1 = 1 P P f1 1bp P f 1 +1bp 2 100,, 1 P P f8 1bp P f 8 +1bp The yield curves f i 1bp and f i 1bp to determine the market s P and P fi +1bp f for the first three i 1bp maturity segments are as follows: Scale up partial durations on the basis of 1 bp to 100 bp through multiplying them by 100. This leads to the following report. Question 6: Notes on question 5 Particulars of the securities reported un question 5 should be explained in response to this question. If applicable, the following amounts should in any event be explained: Pension Funds Reporting Framework 46