NETHERLANDS – The €5.9bn pension fund of telecommunications company KPN outperformed its benchmark by 1.3 percentage points last year, returning 12.8% on investments.

As a result, the scheme saw its coverage ratio rise by 3.7 percentage points to 103.9%, just 0.2 percentage points short of its required minimum funding, according to its 2012 annual report.

However, it noted that the employer had paid a previously agreed additional contribution of more than €75m to limit the funding shortfall.

It said it was following a dynamic investment policy, aimed at limiting interest and equity risk.

KPN’s 38.7% fixed income allocation was the best performing asset class, returning 13% over the period.

Emerging market bonds returned 17.8%, while holdings in inflation-linked bonds (ILBs) returned 18.3%, mainly thanks to investments in Italian ILBs.

Its decision to offload part of its European government bond portfolio in favour of credit increased returns and lowered risk, it said.

Meanwhile, the scheme’s more than 40% equity allocation returned 9.8%, in part due to a nearly 24% return from emerging markets.

Property returned just 0.4%, although listed investments returned 25.9% “thanks to rising markets in Germany and France”.

However, 4.1 percentage points of the scheme’s overall return was due to the dynamic interest hedge through swaptions (50%), swaps and fixed income investments, it said.

During 2012, it decreased the initial 85% interest cover to 73% and subsequently to 55% at year-end, in the wake of falling interest rates.

The KPN scheme charged a 21.1% premium over the pensionable salary of up to €45,378, with any exceeding part of the salary subject to defined contribution ‘free of choice’ arrangements.

The board acknowledged that it has consulted with KPN’s three other pension funds about setting up a ‘multi scheme’, but said the discussion had been put on hold pending the revision of the pension contract.

It also confirmed that it renewed its contracts for asset management, administration and advice with its provider TKP, as of 1 January.