NETHERLANDS - The €244m pension fund of animal nutrition company Nutreco will cut the pension rights of its participants by 3.1% in 2012, if its five-year recovery plan does work out as anticipated.

The yearly 2.1% pension build-up given to active participants could also be decreased to 1.24%, excluding any indexation, the scheme said in its new recovery plan.

However, the 29.4% contribution - as part of collective defined contribution arrangements - from the sponsoring company will remain unchanged at this is already set to cover costs, according to the scheme.

The pension fund had to redraw an earlier recovery plan as pensions regulator De Nederlandsche Bank deemed its initial forecast for fixed income returns as too optimistic.

In particular, its low cover ratio meant the Nutreco scheme was not allowed to take a €12.1m loan from its sponsoring company into account, officials said, as the loan equalled 4.9 percentage points of its cover ratio.

The Stichting Pensioenfonds Nutreco was hard hit by the combined effect of the fall in the equity markets and the decreasing long-term interest rates, and saw its cover ratio drop from 130% to 78% by the end of February 2009.

Whether the cuts will take effect depends on the actual recovery of the scheme's funding ratio, which has to reach 104.3% in 2014, the board stressed, adding a final decision will be taken at the end of 2011.

That said, the fund's performance is already ahead of target on the recovery plan, thanks largely to rising long-term interest rates and improving equity markets.

Whereas pension fund officials had aimed to build a funding ratio of 86.3% by the end of 2009, the cover had risen to 92.8% by the end of November, according to the board.

The Nutreco pension scheme, which has contracted-out its asset management to Mn Services, has temporarily reallocated assets to long-term nominal government bonds at the expense of its equity portfolio, said Harrie Penders, the scheme's chairman.
 
As part of the reconstruction, the 50.4% fixed income allocation of the scheme's matching portfolio has been increased to 70%, divided to place 38% of assets in inflation-linked bonds, along with 12% in investment-grade corporate bonds and 20% in long-term government bonds, according to Penders.
 
In addition, the equity allocation in the return portfolio has been decreased from 22.1% to 7.8%, with high-yield bonds investments rising by 1.6% to 6.3% and emerging market debt raised by 0.6% to also 6.3%.
 
Furthermore, the pension fund has almost halved its allocation to property and hedge funds to 4.8% and 2.4% respectively, while investment in commodities has been cut by 0.9% to 2.4%.

As a consequence of the portfolio adjustments, the Nutreco scheme has also changed its 50% interest rate hedge on liabilities to a 40% cover on real interest rate risks and a 30% hedge on nominal risks.

Although the scheme's strategic investment mix remains unchanged, the board said it has decided to increase prudence in the construction of the new portfolio, which will be in place for the next three years.

As the adjustments of the investment portfolio has decreased the risk profile of the pension fund, its required long-term cover ratio is now 114%, rather than 119% based on its strategic portfolio.

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