NETHERLANDS - The €4.7bn pension fund of telecommunications giant KPN has increased its strategic interest hedge from 70% to 100% and introduced swaptions to minimise the risk of a very low funding ratio.
The options on swaps allow the scheme to benefit from rising interest rates as well, the scheme said in its annual report.
The amount of swaptions represents 50% of the hedge, while the other half is still covered by swaps and fixed income investments.
Interest swaps and swaptions contributed 3.6 percentage points to the pension fund’s result of 10.2% in 2010.
Earlier last year, the Stichting Pensioenfonds KPN mapped its risk profile through the Financial Institutions Risk Analysis Method (FIRM) of supervisor De Nederlandsche Bank and hired an independent adviser for board support.
The KPN scheme said it also covered more than 75% of its 39% equity portfolio through put options.
In addition, it has fully hedged the risks on its main currencies, which contributed negatively to the 2010 result, mainly due to a rise of the US dollar, it said.
Equity delivered a 15% return, while the scheme’s fixed income portfolio generated 3.5%
Actively and passively managed commodities returned 17.4% and 7%, respectively, while property holdings returned 2.2%.
Officials stressed that the KPN pension fund was following the multi-manager principle for its investments with the view to increasing the chance of beating the benchmark.
Last year, the scheme’s coverage ratio fell by 2.2% to 104.3%, mainly due to an expected increase in longevity, but also following decreasing long-term interest rates, the criterion for discounting liabilities.
As its funding was still short of the required minimum of 105%, the pension fund refrained from granting indexation and had to request an additional contribution of €41m from its sponsoring company.
The Stichting Pensioenfonds KPN has 51,400 participants, of whom 22,385 are deferred members and 13,275 are pensioners.