GERMANY - Nestlé Pensionskasse (NPK) finished 2006 with a return of 5% as a strong performance as strong equities compensated for underperforming bonds.

NPK, the €994m pension fund for German employees of food giant Nestlé, said its fixed income investments returned just 0.01% because of last year's increases in bond yields.

The scheme allocates 63.7% of assets it to fixed income, almost all of which are European government bonds.

But "the good performance of European equity markets in 2006 meant that, despite an underperformance of our bonds, we finished 2006 with a net return of 5%," said Peter Hadasch, board member at NPK in charge of investments, in an interview with IPE.

According to Hadasch, NPK's equities earned 16.2% in 2006, which exceeded a benchmark of 15.8%, and the scheme had 28.5% of assets invested in equities via funds last year. 

While NPK's 5% net return for 2006 is below that of other European schemes, the figure is on par with other German Pensionskassen, which are insurance-type schemes and is also more than double the current 2.25% return Pensionskassen guarantee on annual basis.

NPK's return for 2006 was also dampened, however, by a decision to increase its reserves to €30.7m from €5.2m - a move, according to Hadasch, partly motivated by regulatory requirements.

At just under 30%, NPK's equity exposure is one of the highest known ratios for German Pensionskassen because despite the bull run of the last four years, these schemes have invested no more than 15% of assets in shares.

NPK also allocated 7.8% of its assets to real estate, and returned 4.4% in 2006 - on par with an internal benchmark.

"Currently, all of real estate investments are direct holdings in Germany, but we are considering diversifying this portion within the eurozone," said Hadasch, albeit he did not elaborate further.

Elsewhere in 2006, Hadasch said the number of NPK's insured members rose slightly to 21,085, partly because employees who left Nestlé were able to remain with the scheme and pay into it. NPK's pensioners also rose by 67 to 8,629.

Regarding the outlook for 2007, Hadasch said as NPK's risk budget had been fully repaired and its assets had performed well, its board would suggest a higher-than-expected increase in benefits for insured members.