NETHERLANDS - Dutch supervisor De Nederlandsche Bank (DNB) has told the €300m pension fund of glass manufacturer Vereenigde Glasfabrieken it must slash its 13% gold allocation to less than 3%.

The DNB said the investment carried a concentration risk, which could lead to a coverage shortfall if the gold price imploded.

It suggested that, given pension funds' commodities allocation of 2.7% on average, the scale of the investment was at odds with the 'prudent person' approach.

Yesterday, the scheme lost its legal request to overturn the watchdog's direction.

The scheme, referring to its 85% allocation in AAA-rated government bonds, said it disagreed on the risk and claimed that changing its equity investments for gold had lifted its coverage ratio by 3 percentage points to 104.7% in 2010.

The pension fund further argued that a recent asset-liability management study (ALM) supported its policy.

In October 2009, its board decided to double its gold allocation to more than 13%, while disinvesting its 17% equity holdings.

Rob Daamen, board member of the scheme, said: "The decision to raise the allocation was made in the expectation that the markets' rise would not be sustainable and a considerable downward correction was likely to follow."

He indicated that the initial investment in gold in 2008 followed the assumption that the gold price was going to increase for at least five years, on the back of rising demand from India and China.

The Stichting Pensioenfonds Vereenigde Glasfabrieken must now submit a plan showing how it will disinvest its surplus gold holding within two months.

According to Daamen, the scheme is considering a procedure on the merits of the case.

"If we win our appeal against the instruction of the DNB, we can claim compensation for any loss we might incur," he said.

Daamen stressed that the scheme's gold purchase - as a way to "secure the pension fund's assets value" - had worked out well, as the gold price had almost doubled since 2008.

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