Pensioenfonds Horeca & Catering has increased its interest rate hedge from 50% to 80% to protect its funding ratio against falling interest rates in the run-up to the fund’s transition from a defined benefit (DB) to a defined contribution (DC) arrangement.

The fund, which currently has a comfortable funding ratio of 131%, made no steps to reduce equity risk because it is “more sensitive to interest rate shocks than to equity shocks,” according to a spokesperson for the pension fund.

He added: “The funding ratio is expected to remain above the required [level] even in the event of a very severe equity market downturn.” The fund, which invests a small majority of its assets in equities, did not explain why this would be the case.

Horeca & Catering needs a funding ratio of at least 102% to make the transition to the new DC system without having to cut pensions, the fund said in its implementation plan it has submitted to regulator DNB.

No swaptions

The pension fund also considered protecting its funding ratio using non-linear strategies such as swaptions (options on interest rate swaps) or put options, but decided against this option because of “complexity and higher risks”.

“If you use swaptions to protect your portfolio from falling interest rates, the protection only kicks in after a certain fall in interest rates,” the spokesperson said. “That way, a linear hedge offers a higher degree of security.”

Pensioenfonds Horeca & Catering does not expect to make any major changes to its strategic asset allocation in the new DC system. This contrasts with the views of the APG staff fund, which announced it would reduce its equity exposure and invest more in credit.

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