NETHERLANDS - The €10bn pension fund of ABN AMRO has decreased the susceptibility of its coverage ratio to interest movements by increasing the exposure of its investment portfolio through derivatives.

In its annual report for 2010, it said it had upped the exposure of its matching portfolio - meant to finance its liabilities and holding 68% of its assets in fixed income investments - by 10.9% compared with its market value.

Pension fund officials said the resulting leverage allowed the scheme to hedge a larger proportion of the interest risks on its liabilities, "without limiting the options for extra returns".

The exposure is part of the scheme's dynamic re-balancing policy, aiming at regularly adjusting the risk/return ratio of the matching portfolio and return portfolio, based on funding developments.

The pension fund has hedged 85% of its liabilities and commissioned a survey into its options to insure the remaining risks against acceptable costs.

The scheme's matching portfolio returned 9.7%, while its return portfolio of equity, credits and indirect Dutch property generated 9.8%.

However, the scheme said its overall return of 11.5% was more than offset by a 15.8% rise of liabilities, which caused its funding ratio to drop by 8 percentage points to 108%.

It attributed the liabilities increase to the combined effect of a 2.7% indexation for 2009-10, a net drop in long-term interest rates and increased longevity.

The ABN AMRO Pensioenfonds said that, to decrease its susceptibility to sharp market movements, it had swapped its market capitalisation-based benchmark for a criterion that takes companies' fundamental characteristics into account.

It added that it had divested the remaining actively managed equity mandates for developed markets and replaced them with two mandates with a fundamental benchmark (FTSE-RAFI Developed 1000) and two mandates based on minimum volatility (MSCI Minimum Volatility).

Officials said the scheme had decreased its full currency hedge to 90%, as this would "significantly decrease the costs of the currency overlay, while only limitedly increasing risks".

The ABN AMRO scheme also said it had extended the monitoring of its asset managers through monthly reporting on their organisation, investment policy, result, risk and compliance.

Last year, the scheme introduced a contribution for its participants of almost 6.7% of their pensionable salary.

The pension fund has outsourced its asset management to several asset managers. Its pension plan is being implemented by the pension bureau of its employer.

The scheme has almost 78,000 participants in total.