Measuring and Managing Risk, Return and Incentive Compensation at apg Stefan Lundbergh, Head of Innovation Centre, APG Investments Onno Steenbeek, Head Corporate ALM and Risk Policy, APG ICPM meeting Toronto, 3 June 2008

2 Agenda 1.APG: new kid on the block 2.Starting point: financial strategy 3.Risk management 4.New Portfolio structure (LHP-ROP) 5.Innovation 6.Challenges

3 Top 10 assets pension investors Source: P&I/Watson Wyatt World PF 300, For APG combined figures for government, education and construction sector pension fund assets

4 2.Starting point for clients: financial strategy Step 1:pension deal Step 2:expected cash flows (liabilities) Step 3:utility function Board of Trustees Step 4:financial strategy Step 5:strategic investment plan Step 6:current asset mix

5 Crucial tool: ALM Probability underfunding in 12 months < 2,5% Current position Expectation

6 Most important tools: a)Conditional indexation b)Diversification c)Duration extension d)New portfolio structure: LHP-ROP 2. Risk management at the fund level

7 2a. Conditional indexation Example: 130% 105%

8 2d. LHP - ROP Strategy derived with participants in mind Pension Investor ≠ General Asset Manager Risk free Dutch linker with 17 years to maturity ObjectiveHigh and stable long-term real returns RestrictionsMismatch risk HorizonClient (15+ years, real) Regulator (1 year, nominal)

9 Theory – Finance 1.1 LHP (ILB+…) Best Mix of Stocks, Bonds and other assets (ROP) Conservative Investor Bonds Stocks Aggressive Investor Moderate risk averse investor Risk Expected return

10 Simple on the outside, complex inside ROP LHP

11 Idea generatorsour 450+ professionals Decision bodyInnovation Committee Operational bodyInnovation Centre Innovation processstepwise with low entry hurdle Capital allocation2 percent of assets Continuationsafe environment, opportunity

12 Innovation Process

13 Example 1:Timberland

14 Example 1: First investment Global Solidarity Forestry Fund

15 Example 2:Music Rights

16 Example 3:Landfills

17 Challenges Culture and Attitude Competitive remuneration Organizational focus on investment RETURN ALM as integrated part of pension fund investing Augment collective pension solutions

18 Concluding remarks Pension Investor ≠ General Asset Manager Our approach is based on our situation We explore our unique advantages Open to innovate with peers and likeminded Complex + challenging + difficult = interesting

19 Thanks for listening