Interest rate hedging pays off at Industriens
DENMARK - Industriens Pension generated a positive 4.4% gross return in 2008 by hedging all of its interest rate risk.
The DKK61.8bn (€8.3bn) pension fund, which has an asset allocation of 59% in bonds, 21% in equities, 11% in cash, 6% in unlisted investments and 1% each in real estate, infrastructure and absolute returns, also reported its members incrased by 15,000 to 366,790, while pension payments reached DKK6.4bn.
Industriens Pension also confirmed the positive investment return helped the value of the pension fund increase from DKK48.5bn in 2007 to DKK61.8bn, as the investment return for the year was 4.4% before tax and 3.7% net.
The organisation said its positive results were partly because of a reduction in equity holdings since the start of the financial crisis - foreign equities fell from 19% to 15% and Danish stocks dropped from 10% to 6% over the year - but was largely as a result of its decision in 2007 to hedge 100% of the interest rate risk for future liabilities.
The pension fund said if it had not hedged to provide protection against the interest rate falls in 2008, the investment returns for the year would have been -12.3% before tax and -10.5% net.
Laila Mortensen, chief executive of Industriens Pension, said the positive result means the scheme starts 2009 with “large reserves”, which in turn allows it to “increase investment risk when [they] consider it to be attractive”.
The pension fund reported it has seen an annual return since inception of 8.1% per annum, while the gross return on investments in 2008 totalled DKK 2.2bn - up from DKK100m in the previous year.
Industriens Pension also said while the increase in membership makes it one of the largest Danish pension schemes, the planned merger with Pensionskassen for Nærings og Nydelsesmiddelarbejdere and the Pensionskassen for Håndværk og Industri on 1 January 2010 will add a further 50,000 members.
Although Mortensen added the influx of new members and companies will increase economies of scale, in the long-term it will help to “keep costs down for the benefit of both current and new members”.
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