NETHERLANDS - The €5.2bn Dutch postal pension fund TNT returned 12.7% on investments in 2010, despite losing 2.7% in the fourth quarter following rising interest rates.

As long-term interest rates rose from 3% to 3.8% during the last three months, TNT's extensive hedge against decreasing rates contributed -4% to the quarterly results, the pension fund said.

However, because TNT had sold its 75% hedge of interest swaps and replaced them with swaptions equating to a 100% swap cover following a new investment policy in the third quarter, it could limit its loss, officials said.

Roelie van Wijk, chief investment officer of TNT's asset manager TKP, said: "Contrary to interest swaps, swaptions allowed us to keep on benefiting from higher interest rates, while still offering protection against a further rates decrease."

Excluding the result of the interest hedge, returns on investments were 1.3% in the fourth quarter, mainly due to a 3.8% return of TNT's 45% equity portfolio.

Pension fund officials attributed the equity performance to excellent fourth-quarter corporate results, as well as better than expected economic figures in the US and Germany.

Van Wijk said the scheme has also hedged 75% of the risk of decreasing equity markets through call options, combined with an investment in German and Dutch government bonds.

"However," she added, "following rising equity markets, the returns on these investments were less than on the regular equity investments."

Officials at the postal scheme said the interest rate increase and the persisting debt problems of European governments negatively affected its fixed income holdings of 32%, which returned -4.2% in the fourth quarter, leading to an overall return of 3.1% for  2010.

TNT's alternative investments - commodities and hedge funds - were overall its best performing asset class, with returns of 12.3% and 10.3% in the fourth quarter and the full year, respectively. Property delivered 2.4% in the fourth quarter, generating 3.9% during 2010.

Officials said the scheme's coverage ratio increased by 3.9 percentage points to 107.5% during the last three months and that TNT's funding included the full prediction for increased longevity.

The current coverage means the pension fund is ahead of its recovery plan, they said.

TNT has a total of 95,000 participants, 37,000 of whom are active.