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High interest hedge slows coverage recovery on €1.7bn Delta Lloyd fund

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NETHERLANDS - The €1.7bn pension fund of Dutch insurer Delta Lloyd attributed its slowly improving coverage ratio to its 90% hedge of the interest risk on its liabilities.

Because the hedge was achieved through a 90% matching portfolio of mainly fixed income funds, a relatively low margin was left for investments in securities, it said.

The scheme's nominal coverage ratio rose from 116% to 121% in 2009, including a 3.5% provision for increased longevity.

Arie Kool, chief executive, said: "The pension fund has followed the risk-averse policy of our sponsoring company.

"Already before the credit crisis started, we had our interest hedge in place to stabilise our coverage ratio."

The pension fund managed to avoid the need for drawing up a recovery plan, which is required as soon as a scheme's funding ratio drops below 105%.

However, Kool noted that the fund's coverage ratio had dropped to 117% due to falling equity markets.

The 70% matching portfolio of the Stichting Pensioenfonds Delta Lloyd, which has fully re-insured its liabilities with Delta Lloyd Levensverzekering, returned 8.2%, with corporate bonds generating 14.1%.

The scheme said its matching portfolio included a swap overlay to match the duration of the portfolio with the duration of the nominal liabilities.

With an overall return of 15.2%, the portfolio fell 9 percentage points short of the benchmark due to its diversification into several equity investment styles, property and alternatives, according to pension fund officials.

Equity funds generated 22%, mainly from worldwide investment funds and thematic funds, while the defensive Blue Return fund in high-yield equity returned 16%.

The scheme said it purchased €20m worth of equity in Delta Lloyd Investment's European Participation fund at the expense of participations in the matching portfolio after its matching percentage had increased to 95%.

It also bought €30m of participations in DLI's Diversification Strategy fund, aimed at achieving good long-term equity returns while scaling down its risk profile, it said.

The Delta Lloyd scheme said it intended to divest part of its non-listed property participations, as its allocation had exceeded its bandwidth following decreasing equity holding.
 

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