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Rabobank pension scheme loses 3.1% due to coverage ratio hedge

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NETHERLANDS - The €11.5bn pension fund of Rabobank returned 10.5% on investments, but ultimately lost 3.1% of its assets due to its extensive strategic hedge to protect its coverage ratio.

At the end of 2009, its nominal funding was 121.8%, including a 5% financial provision for increased longevity, according to its annual report.

However, the scheme's coverage ratio at the end of 2007 and 2008 was 159.5% and 128.6%, respectively.

As its required nominal cover ratio is 108%, the pension fund has stayed clear of the obligation of drawing up a recovery plan.

It was also able to grant a full indexation of 1.4%.

Already before the credit crisis took hold, the scheme had protected its coverage ratio through equity-linked swaptions for 70% of its balance sheet, while it hedged remaining assets through equity puts and interest swaptions.

However, following rising equity markets, a change in the forward curve for swap interest, decreased volatility in the equity markets and interest rates - as well a change of the actual hedge - the value of the strategic cover has dropped from almost €3bn to €1.3bn last year, according to officials.

They explained that the hedge was restructured by selling €900m of share put options and buying back €3bn of payers swaptions to profit from a rise of equity and interest markets "against an acceptable additional risk".

The Rabobank scheme has also purchased €3.5bn worth of inflation swaps with a duration of 10 years on average in a bid to protect its real coverage ratio, which has gradually decreased from 98.6% in 2006 to 72% last year.

Several of the pension fund's main asset classes underperformed, with the 23.8% return of the equity portfolio falling 5.2% short of its benchmark.

The scheme attributed the result to its quantitative model, which was caught out by the abrupt market turn in March.

Its fixed income portfolio returned 5%, with officials noting that the lagging results of government bonds outweighed the outperformance of corporate bonds.

Devaluations of several funds caused private equity to fall 28.9% short of its benchmark, according to the scheme, which reported results of 2.6% and 22.3% for its allocations to infrastructure and commodities, respectively.

Direct property, indirect real estate and liquid assets generated 4.5%, -13.7% and 0.6%, respectively.

Following an asset-liability management study, officials said the pension fund had raised its equity holding by €750m, largely by increasing its allocation to emerging markets from 4% to 14%.

They said the Rabobank scheme had divested most of its €384m stake in a fund of hedge funds due to "doubts about the added value" and "its lack of transparency".

The fund has also initiated a separation between government bonds and corporate bonds within its fixed income portfolio, and introduced a new portfolio of Dutch mortgage-covered bonds, as well as a real return portfolio through an investment in future's manager Transtrend.
 

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