Pension fund Mediahuis Netherlands, the €1.3bn scheme of the Dutch publishing company, bought put options on its “risky investments” last year to protect its funding ratio.
After the fund’s funding ratio rose above 120% in June last year, the board decided to protect this “relatively favourable” funding ratio against major downward shocks in the run-up to the fund’s transition to a new defined contribution (DC) arrangement in 2027.
For this, the fund says in its annual report, “several alternatives were explored, including reducing equity investments, the use of put options and the use of a collar strategy”.
As the fund’s board felt that the fund should continue to take investment risk, it was decided that put options would be bought to protect the return portfolio.
Additionally, the interest rate hedge was increased to 80%, and the fund’s multi-factor developed markets equity portfolio was discontinued.
“This semi-passive investment philosophy had been in our equity portfolio for over six years and has struggled to keep up with the broad market under a range of market conditions,” according to the fund.
Put options
The put options strategy ensures that the pension fund is protected against any price declines in its developed market equity portfolios, according to CIO Frank Huitema.
The fund has also bought protection for its emerging markets equity portfolio and other “riskier investments” including high yield bonds, real estate and infrastructure. Altogether these asset classes account for 48% of the fund’s investment portfolio.
Pensioenfonds Mediahuis bought the options more than 2.5 years before its planned DC transition on 1 January 2027. This is much sooner than other funds that decided for a construction with options, such as the professional pension fund for physiotherapists, which bought protection less than a year before its planned transition. Normally, the longer the period covered by put options, the higher the price that is to be paid for the protection.
For Pensioenfonds Mediahuis, the purchase – carried out by a specialised asset manager – cost the fund €22.8m.
“This is about 1.85% of the value of the investment portfolio at the end of June 2024,” said Huitema. “That we bought these options already in 2024 is because it is very important for us to reduce as much as possible the likelihood that the funding ratio can drop below 110%.”
Expiry after DC conversion
Huitema still considers the price paid for the options strategy as “relatively cheap,” as the options were bought in a “relatively quiet market” in the first half of 2024.
“The additional cost compared to a purchase expiring in 2026 was relatively small. Moreover, we had made a return of more than 30% on equities in the previous 18 months,’ said the CIO.
For the same reason, the decision was taken to allow the options to continue until a year after the planned DC conversion date.
“We assume that we will be able to move to DC on 1 January 2027, but it didn’t cost much to have one extra year of protection.”
This article was first published on Pensioen Pro, IPE’s Dutch sister publication. It was translated and adapted for IPE by Tjibbe Hoekstra
No comments yet