NETHERLANDS - The €1.2bn pension fund of shipping company Nedlloyd has replaced its swaps as a hedge against interest risks on its liabilities with swaptions to profit from the rates rise it is expecting.

Clarifying the annual report for 2010, Ton Zimmerman, the scheme's director, said: "As a consequence, we won't be affected by a rates drop. Two-thirds of the pension fund's 12,200 participants are pensioners, and, therefore, we can't afford the coverage ratio dropping below the required minimum of 105%."

As long as long-term interest rates are below 4%, the Nedlloyd scheme's interest cover will consist fully of swaptions, but as soon the rates rise, it will in part revert to swaps, according to Zimmerman.

Since 2009, the pension fund has hedged three-quarters of its interest risks, of which one-third was made up of swaps initially.

Last year, the board decided to hedge three-quarters of the equity risks through put options on a combination of indices.

The protective measures led to the additional advantage that the scheme's required financial buffers were lowered from a coverage ratio of 113% to 109%, according to the pension fund.

Because the current funding ratio of the Nedlloyd Pensioenfonds is 112%, the scheme has recovered sufficiently from the impact of the financial crisis.

However, the Nedlloyd scheme refrained from granting indexation, following a new gradation that allows inflation compensation from 115%, with full indexation occurring only at 125%.

"The new ladder decreases the risks for the pension fund, while not affecting pensioners purchasing power," Zimmerman said.

So far, the Nedlloyd scheme has added 6% to its liabilities for increased longevity, taking into account its actuary's figures on fund-specific mortality, he said.

Since 2003, three pensioners have been part of the pension fund's nine-strong board, relieving it from having the mandatory participants council.

However, to have a feedback group, the board has established its own 'advisory council', with statutory rights similar to those of the participants council, the director said.

Following recommendations on risk management from the Frijns Committee, the Nedlloyd Pensioenfonds last year divided assets into a 45% return portfolio and a 55% matching portfolio, with the former aiming for outperformance through active management.

The matching portfolio consists of the fixed income investments needed for covering the cash flow of the liabilities, as well as the interest risks on the liabilities, according to the pension fund.

Last year, it returned 7.1% on investments, beating its benchmark by 1.3 percentage points.

With a return of 25.8%, equity was the best performing asset class, while private equity holdings generated 17%, mainly thanks to the positive revaluation of companies. Both fixed income and property returned 3.8%.

The Nedlloyd pension fund has an 11-strong pension bureau, carrying out its administration and directing its asset managers.