NETHERLANDS - A €5bn pension scheme for KLM flight staff suffered an investment loss of 9.2% last year, yet this is hailed as being the best performing pension fund of the airline's three large schemes in 2008.

Details of the funds' annual reports revealed the €3.9bn scheme for ground staff and the €1bn pension fund for cabin crews reported returns of -20.8% and -21.3% respectively.

The Stichting Pensioenfonds Vliegend Personeel said its 59.5% fixed income allocation returned 3.9%, while its 32.5% in equity investments returned -36.5%, and its 11.2% holding in real estate lost 24.1%.

In contrast, the Stichting Pensioenfonds Cabinepersoneel reported a loss of 42.5% on its 39.7% equity allocation and a negative yield of 25% on its 8% property investments.

The scheme attributed the disappointing returns on turbulent losses in the equity markets but the 2.8% yield could also have been better as the 56.8% fixed income portfolio was overweight to emerging markets, and the sector performed worse than anticipated.

Inflation-linked bonds returned no more than 2.1% because of the decreasing inflation prospects, whereas all schemes said long-term government bonds generated returns of 15.5%. Their fixed income portfolios consisted of over 50% in index-linked loans.

Officials explained that the KLM schemes - managed by pensions provider and asset manager Blue Sky - decided not to rebalance their portfolios last autumn when high prices followed extraordinary market conditions.

They had initially planned to increase their equity and property allocations at the expense of the overweight fixed income portfolio, according to officials.

In contrast, however, the pension funds have increased the allocation to European and US private real estate to approximately 60% of the property holdings.

The three schemes also refrained from "very costly" resetting of their contracts for currency hedging, and instead decided to invest the available assets in bonds.

All of the KLM pension funds' assets are fully hedged against the major currencies and have recently begun hedging the Swedish krona.

The three schemes also said they will continue securities-lending for the time being, to prevent losses, but have sharpened the conditions under which new transactions can be completed.

The KLM schemes will stick to their policy of managing the mismatch between the duration of investments and the duration of liabilities by investing a large proportion of their assets in long-term inflation-linked bonds and long-term bonds.

The cover ratio of the three pension funds varied from 107.8% to 121.9% by the end of 2008, but it was the funding ratio of the cabin staff scheme which tumbled from 192% to108%. These scheme's cover ratio had increased to 121.7% by the end of June.

The pension funds for flight staff, cabin crews and ground staff have 5,200, 12,120 and 33,400 participants respectively.

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