NETHERLANDS - The €23bn metal scheme PME has increased its options for meeting securities obligations by arranging with counterparties to exchange fixed income assets as a security.
With the move, it reduces the risk of a forced divestment of assets to obtain necessary liquid assets - as security for its derivatives against interest and currency risks - during sharply falling markets, according to its annual report for 2010.
As part of a series of measures to decrease its liquidity risk, it reduced its the swap-based hedge of the interest on its liabilities from 75% to 65%.
In addition, the pension fund fully divested its inflation swaps and lowered its currency hedge of the US dollar from 110% to 100%.
To compensate for the increased balance risk, PME has raised its strategic allocation to long-term European government bonds by 7.8% to 45.3%. It has also decreased its high-yield bond holding from 20% to 14.4%.
In 2009, pension supervisor De Nederlandsche Bank issued PME with a formal instruction to improve its investment policy and portfolio, as well as risk management, after its coverage ratio dipped to an absolute low of 84%.
In its report, PME claimed to have improved its control over investments considerably by tightening its arrangements on risk monitoring with its pension provider and fiduciary manager Mn Services, extending its own pension bureau and appointing a risk manager and a director of investments.
Earlier this year, it also appointed Franswillem Briët as its new independent chairman with extended tasks, as well as two new board members with specific expertise on investment and risk management.
According to the board, the measures have led to a proper countervailing power toward its pension provider and asset managers.
Officials at the metal scheme added that it has also decided to reject investment proposals from external managers if they are unable to assess the proposals independently.
PME - the second-largest market sector scheme - reported an overall return of 12.2%, increasing its assets by €2.2bn to the pre-crisis level of €23bn.
However, due to the combined effect of falling long-term interest rates and increased longevity, its coverage ratio fell to 96% at year-end.
Fixed income generated 9.2%, with high-yield bonds even returning 21.7%, while equity returns varied between 10.5% for Europe and 28.4% for the Far East.
Property and alternatives returned 3.2% and 15.6%, respectively.
Last year, PME transferred its pension administration from Syntrus Achmea to Mn Services, but it noted that the new provider initially did not achieve the required quality level, and that the improvement process was still continuing.
Following its recovery plan to a funding of 104.3% in 2013, PME kept its contributions at 23% and also refrained from indexation.
The metal scheme has 632,000 participants in total, of whom 149,000 are pensioners and 139,000 are active participants. PME has 1,230 affiliated companies.