NETHERLANDS - PDN, the €5.2bn pension fund of chemicals manufacturer DSM, has divided its assets into matching, return and inflation portfolios in a bid to reduce the scheme’s financial risks.

Last year, its combined returns were 6.7% - an outperformance of 0.9% - mainly thanks to the high return of its matching portfolio, designed to hedge the pension fund’s interest risks, according to its annual report.

The matching portfolio - consisting of 45.3% of the scheme’s assets in euro-denominated bonds, supra-national government loans, credits and swaps - generated 20.4%, due to the steep drop of interest rates.

For most of the year, PDN covered 65% of the interest risks on its liabilities after it decreased its hedge by 10 percentage points in February “based on the economic outlook of the moment”.

In contrast, its 43.9% return portfolio delivered a loss of 3.6%, which PDN in part attributed to large losses on Greek government paper, with high-yield government bonds and inflation-linked bonds (ILBs) returning -35.3% and -52.2%, respectively.

As a result, it saw its holdings on Greek government paper from €77m to €32m last year.

It added that it also lost 35.4% on its credits portfolio, as it was “strongly overweighed” in subordinated financials, which performed “very badly” in 2011.

The scheme’s 11.4% inflation portfolio generated a 9.7% profit, an outperformance of 19.4%, thanks to the divestment of Italian, US and Japanese ILBs, it said.

PDN further reported returns on alternatives and property of 2.8% and 0.2%, respectively, with US and European real estate delivering 16.3% and -9.7%, respectively.

On the back of an initial recovery during the first six months, and a coverage ratio of 114% in May, the scheme’s board granted its workers an indexation of 3.53% and promised its deferred participants and pensioners an inflation compensation of 0.69% on 1 July.

However, because its funding fell 101% at year-end after interest rates fell further, it said it would refrain from indexation on 1 January.

The scheme has contracted out its pensions provision, including asset management, to DSM Pension Services (DPS), a subsidiary of sponsor company DSM.