NETHERLANDS - The €880m pension fund of pensions regulator De Nederlandsche Bank has downgraded its investment risks by divesting equity in favour of fixed income investments.

The scheme's equity and fixed income allocation is now 78% and 16% respectively, according to its five-year recovery plan, as the fund's cover ratio had dropped to 99.1% by the end of February.

A proposed combination of measures should help the scheme reach its required financial buffers within 15 years, though officials said a future cut in benefits still cannot be ruled out should equities market deteriorate further and long-term fixed income interest rates remain low.

The pension fund has also started selling its inflation swaps as part of its recovery plan In order to focus on hedging interest rate risks against its nominal liabilities.

"Because of our present cover ratio, we want to avoid the risk of losses caused by a further drop of inflation expectations in the market," explained officials.

Based on its regulations, the scheme still intends to pay its active participants an indexation this year, but the inflation compensation paid to pensioners and deferred members is conditional, so both groups are unlikely to receive indexation, the DNB scheme indicated.

The recovery plan of the Stichting Pensioenfonds De Nederlandsche Bank is also based on a new contribution ladder, leading to an increase in contributions from almost all levels, officials said.

The DNB scheme returned -2.7% on investments last year, while its assets dropped by €35m.

It had already decreased its equity allocation from 35% to 20% and raised its fixed income investments from 65% to 74% in 2008, while the remaining assets were allocated to property (5%) and commodities (1%), in order to diversify its investments.

Despite this, the scheme lost 50% on its commodity investments last year, while equities and real estate generated negative performance of -40% and -6% respectively.

The 13% profit on fixed income investments - including the hedge on interest risk and inflation risk - was also limited by a larger rise of liabilities, following the drop in long-term interest rates.

The DNB pension fund had already considerably extended the duration of its fixed income investments over the previous three years, in order to limit interest risks to its liabilities, officials pointed out in the recovery plan.

Without the adjustments to the investment policy, the cover ratio of the pension fund's cover ratio would have been 10% lower, claimed officials.

As long as its cover ratio is under 100%, the DNB scheme will refuse requests for value transfers from new and leaving participants.

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