NETHERLANDS - The €14bn Dutch pension fund of electronics giant Philips has stopped investing in private equity and funds of hedge funds in favour of commodities and emerging market equity and bonds.

It has also decided to decrease the allocation to government bonds of countries with low credit ratings, and to introduce a new benchmark of countries with the highest rating, according to its 2011 annual report.

The scheme reported an overall return of 6.7% - following a 10.2% profit - for its liabilities-matching portfolio, which accounts for 71% of total assets.

The return portfolio, which contains the remaining assets, lost 1.4% over the period.

However, the pension fund's matching policy could not prevent its nominal coverage ratio from falling from 109% to 103%, equating to a real funding of 70%.

The board said the scheme's liabilities rose faster than its assets after the swap curve - the criterion for accounting liabilities - dropped below the curve for its euro-zone government bond holdings.

The board added that it had refrained from expanding its swaps portfolio, as this would have introduced "new and unacceptable risks".

Due to the funding shortfall, the board decided against granting indexation.

It also decided to raise the indexation threshold from 105% coverage to the required funding of 108% to further improve the scheme's recovery potential.

The Philips scheme reported that its inflation-linked bonds and interest swaps - as part of its matching portfolio - returned 5% and 19%, respectively.

Within the return portfolio, property was the best-performing asset class, returning 10.4%.

Equity produced a 5% loss and commodities fell by 9.4%, while emerging market bonds, high-yield credits and private equity generated 5.8%, 7.8% and 7.8%, respectively.

With a return of 2.1%, hedge funds fell short of their benchmark, "as part of the allocated assets had been invested in cash during a part of the year, following the decision not to replace a sacked manager", the scheme said.

The Philips Pensioenfonds said its loss-making global tactical asset allocation was the main reason for the 2.1% loss on its cash holdings.

The scheme said it continued divesting its direct property portfolio in favour of indirect non-listed real estate, to be managed by Aviva.

Last year, it invested €50m in institutional property funds, equating to approximately 8% of the envisaged portfolio, it said.

The Philips scheme has 15,970 active participants, 59,885 pensioners and 32,520 deferred members.