Dutch pension funds Foodservice, DHL and Gasunie moved to temporarily protect their portfolios against falling equity markets and interest rates ahead of their planned transition to defined contribution (DC) arrangements in 2027. However, their approaches to downside protection differ significantly.
The €1.8bn Foodservice scheme, the pension fund for food wholesalers, bought put options in February to protect its listed equities portfolio against broad market declines.
“The decision has worked out well for us so far. We are very happy with the timing as well,” said Jessica Matelski, trustee at the fund, which had a funding ratio of 129% at the end of February.
Matelski was referring to the escalation of conflict in the Middle East in late February, which triggered falling markets and higher volatility, increasing the cost of downside protection.
The hedging decision was primarily driven by the fund’s aim to protect its funding ratio ahead of its switch to a new DC arrangement on 1 April 2027.
However, rising geopolitical tensions in the region earlier in the year prompted the fund to act sooner than initially planned.
“Besides, share prices were at historically high levels and market volatility was still low, so the costs for put options were limited,” it stated.
In addition to its equity hedging strategy, the Foodservice scheme also increased its interest rate hedge to 115% to protect part of its buffer against lower rates.
The pension funds for logistics group DHL and energy distributor Gasunie took similar steps to buy protection. DHL, which also implemented its hedges in February, cited “unruly financial markets” as the key motivation for acting at that time.
Pensioenfonds Gasunie moved earlier, in January, following analysis of “possible shocks in the funding ratio that could happen in the coming year based on a historic comparison” and additional risks expected over the following 12 months, according to Johan Douma, trustee at the fund.
Tail-risk strategies
The Foodservice pension fund purchased at-the-money put options, locking in price levels at the start of February. The strategy cost the fund around €20m, or 1.5% of its funding ratio.
“If you look at what you pay versus what you get for it, we found it most beneficial to hedge completely. It is a bit more expensive, but full hedging leads to benefits under many more circumstances. There are a lot more scenarios with a small price drop than scenarios with a very large drop,” said Matelski.
Gasunie adopted a different approach, focusing on protection that would effectively secure a minimum funding ratio of 123% by 1 January 2027, when defined benefit (DB) accruals are due to convert into DC capital.
The fund also purchased swaptions to protect against a sharper fall in interest rates.
“Our policy is directed at protection against tail risks,” said Douma.
Because protection only activates at significantly lower index levels, Gasunie’s approach is materially cheaper, costing around 0.7% of its funding ratio, despite covering a larger share of assets (69% versus 29% for Foodservice).
“We didn’t want to pay too much for protection as we may not even need it,” Douma noted.
