The Dutch pension fund of IT giant IBM has reported a 3% loss over 2013, despite a positive return on its investments of 0.3%.
In its annual report, the scheme attributed the performance to the effect of rising interest rates on its interest swaps and swaptions, which it uses to hedge the interest risk on its liabilities.
However, it said the positive effect of the adjusted discount rate on its nominal funding largely offset the impact of rising rates.
Its coverage ratio fell by 1.2 percentage points to 121.9% at year-end but is still 97.4% in real terms.
The pension fund’s financial position enabled the scheme – also known as SPIN – to grant participants in its defined benefit plans an indexation of 1.73% and 2.13%.
Following the new discount rate – the three-month average of interest rates plus the ultimate forward rate – it reduced its interest hedge from 100% to 90%.
SPIN manages pension assets of €3.9bn, largely in defined benefit arrangements, with €300m in a defined contribution plan, and has 14,165 participants in total.
Its assets have been invested in a 70% fixed income portfolio and a 30% securities portfolio.
The scheme said last year’s rate increase caused a 2.6% loss for participants in the last of the five age groups in its defined contribution plan due to the large proportion of fixed income in their investment mix.
“However,” the SPIN board added, “the increased interest rates also had the benefit that retiring participants could purchase a better pension from insurers with their accrued assets.”
The youngest age group in SPIN’s defined contribution scheme – with 90% equity allocation – saw its investments return nearly 19%.
The IBM scheme, which did not disclose specific investment results, also confirmed that it replaced French government bonds with Dutch ones last year.
SPIN said it planned to review its investment mix due to low interest rates and the effects of rising rates and inflation on indexation.
It added that it also wanted to assess the investment portfolio for its DC plan extensively.
SPIN will also examine whether the pension fund’s structure needs to be adjusted for a “proper implementation” of the DB and DC scheme, and said it would look in particular at costs, governance and risk management.
The scheme reported administration costs of €588 per participant and said it spent 0.46% of its assets on asset management last year.