NETHERLANDS - The €284m Dutch pension fund of energy company Total is anticipating a second rights cut of nearly 2% next January - and possibly a third, smaller one, three months later - as its coverage ratio at the end of June fell nearly 9% percentage points below the required minimum funding standard.
The scheme already applied a rights discount of 1.95% in January this year, raised its contribution and replaced its final salary plan by average salary arrangements, in order to improve its financial position.
It said that it was anticipating a further cut of 1.95% at the beginning of next year, with the third cut of another 0.25% later in 2013.
The rights cuts were anticipated despite positive investment returns at the scheme, in particular thanks to its extensive hedge of the interest risk on its liabilities, which generated a profit of 5.8%. The fund achieved an overall result of 7.2%, it said in its annual report over 2011.
The performance was 0.9% short of the benchmark of asset manager Blue Sky Group, according to the pension fund, attributing the outcome to disappointing results of tactical policy during the third quarter.
Following the worldwide drop of equity, it had decided to increase the over-weighting of its stock to 42.9% “for reasons of market value, macro-economic developments as well as sentiment”.
Ultimately, the scheme lost 9.1% on its equity holdings, but it noted that 9% of its portfolio converted to low-volatility stock in May performed relatively well.
The Total pension fund reported a 10.3% profit on its fixed income portfolio, consisting of over 48% of its assets.
It said that it had remained overweight in its more risky positions - such as US high-yield credits and government bonds of emerging countries - but added that the performance of the latter fell short of the yield of other government bonds.
The Total scheme further said that its fixed income portfolio was underweight in 2012, particularly its holdings of euro-denominated AAA government bonds, because of the ongoing uncertainty in the euro-zone.
The pension fund said it has hedged 75% of its interest risk through interest swaps and AAA bonds.
It has also fully hedged the risk on the main currency, as well as on the Swedish crown and the Canadian and Australian dollar.
The Total scheme calculated that 2011 had seen it spend 0.5% of its assets on management costs and that it has paid €638 per participant for pension administration.