NETHERLANDS – The €16.1bn pension fund of Rabobank has expanded its investments in government paper to include non-euro countries with high credit ratings, such as Australia, Canada and Switzerland.

It also tendered a new short-term government bond mandate with an 85% allocation to the euro-zone and a 15% stake in the three non-euro countries, according to its 2012 annual report.

It added that the new portfolio was funded through the previously announced divestment of its hedge fund positions.

However, Rabobank Pensioenfonds conceded the short-term mandate lost 0.22% during its first year, underperforming its benchmark by 0.41%.

The scheme reported an annual return of almost 11%, with combined hedging strategies against a range of risks contributing 1.2 percentage points.

Its 49.1% fixed income holdings returned 7.5%, with government bonds generating 5.9%.

The best-performing asset class was global high yield, the pension fund said.

It attributed the 17.5% return in particular to the European market, and indicated that CCC-rated investments performed better than holdings with B-BB ratings.

With a return of more than 16%, the scheme's 34.3% equity portfolio also performed well, it said, largely thanks to investments in emerging markets.

Credit delivered almost 13%, due to sector allocation as well as individual title selection, according to the scheme.

It added that its "very safe" mortgage portfolio outperformed its benchmark by 1.8 percentage points and returned of 4.5%.

In contrast, the scheme lost 1.4% and 1.1% on its property and commodities holdings, respectively.

Private equity and infrastructure returned 6.6% and 12.9%.

The pension fund further indicated that it decreased its strategic interest hedge from 90% to 60%, while maintaining its equity cover, in the wake of the expiration of its €7bn derivatives portfolio of mainly equity-linked swaptions, purchased in 2007.

It said the adjustment aimed to increase the balance between its long-term goal for indexation and short-term protection against the risk of interest rates falling further.

"This way," it said, "we are better able to benefit from a rate increase, while we accept the increased risk of further dropping swap rates."

To achieve a "layered hedge", the pension fund had already rolled over one-third of its hybrid swaptions in 2011 and converted another part of the cover into "loose" equity put options and interest swaptions.

The scheme stressed that its strategic hedge had prevented a shortfall of its required financial buffers, despite falling interest rates and equity markets, as well as rising life expectancy.

The pension fund, which has almost 97,000 participants, closed the year 2012 with a nominal funding of 118%.

Separately, the employer announced that it is to change its pension scheme from an average-salary plan to collective defined contribution to cut costs and mitigate accounting risks.

Under the new arrangements, which are to come into effect retrospectively from 1 January, the yearly pensions accrual has been reduced from 2.25% to 2%, and the new pensionable age is 67.

In return, Rabobank will pay a one-off contribution of €500m into its pension fund, and said it would keep an additional €250m available to plug funding gaps over the next seven years.