NETHERLANDS - Returns from the €5.5bn KLM pension fund for flying staff fell short of its 2009 target after a defensive strategy failed to capitalise on recovering markets.

The Dutch airline scheme returned 10.5% over 2009 falling 1.1% short mainly attributable to a portfolio largely positioned outside of growth assets.

However, its cover ratio of 133% at year-end still exceeded its required financial buffers and allowed KLM to grant its 5,145 participants a full indexation of 2.5%, according to the company’s annual report.

Officials said that, following a survey into the scheme’s effectiveness and options to improve the management of risk, the board decided not to change either its strategic policy or asset mix for the time being.

During 2009, the scheme initially kept equity and property allocation underweight, favouring fixed income investments instead, and started to rebalance its equity holding as of May.

It was only in the fourth quarter that the pension fund commenced risk-taking investments, increasing the allocation to US and European credits, high-yield bonds and emerging markets bonds at the expense of government bonds.

In December, the KLM scheme increased its equity hedge through diversification, after the value of its equity had risen on the back of rising markets, according to the officials. 

With a return of 31.6%, its 32.4% equity portfolio was the best performing asset class, mainly thanks to emerging markets, according to the Pensioenfonds Vliegend Personeel KLM.

The scheme’s fixed income holding of 54.6% generated 8.9%, while its 10.6% property portfolio yielded 2.9%, it said.

Officials further made clear that, as the inflation risk in the developed world seems to be abating, the pension fund has started an under-weighed position in worldwide index loans.

The KLM scheme indicated it has hedged the interest risk on its liabilities by allocating approximately 70% of its fixed income investments to long-term index-linked bonds and nominal European governments bonds.

The pension fund has applied a full hedge against the risks of the main currencies.