Dutch postal pension fund to hedge interest risk through swaptions
NETHERLANDS - The Dutch postal pension fund TNT will limit its risk by gradually increasing its 75% interest hedge on its liabilities to full cover.
According to its annual report, the €4.6bn fund intends to replace the present cover of interest swaps and bonds with swaptions, which are also meant to decrease the effect of rising inflation.
The TNT plans to hedge risks in its equity portfolio through share options as well.
The postal pension fund reported returns of 16.8% over 2009, with equity generating 32.1% on average.
Investments in emerging markets returned 73%.
Fixed income investments yielded 13.1%, mainly due to the performance of high-yield, corporate and government bonds of emerging markets.
TNT's commodities holdings returned 33% through an actively managed fund that aimed at price differences between the futures markets and the spot markets.
Property fell by 11.9%, the scheme's only loss-making asset class - TNT attributed the outcome to the continuously "disappointing" results of non-listed real estate.
Last year, the TNT scheme saw its cover ratio rise to 108.3%, up from an absolute low of 93% at the end of 2008 and ahead of its recovery plan based on a yearly return of 6.4%.
However, the pension fund said its cover ratio had been hovering between 100% and 105% this year, mainly due to decreasing interest rates.
It added that the assets needed to provide inflation-proof benefits for the long term equated to a nominal funding ratio of 157%.
TNT reported a positive effect from replacing long-term interest swaps with swaps with a duration of 15-20 years, as the long-term interest had "risen the most".
It also said its strategic decision to hedge its currency risk extensively on equity in 2002, as well as the interest risk on liabilities as of 2006, had boosted the scheme's performance.