NETHERLANDS – The Philips pension fund's inflation-protection portfolio – comprising French inflation-linked bonds for the most part – returned 21% last year, according to its annual report.

The €15.2bn Philips Pensioenfonds, whose assets are managed by BlackRock, reported a total return of 12.9% for 2012 and saw its funding rise to the minimum required level of 104%.

The scheme's inflation-protection investments accounted for 13% of its €10.8bn liability-matching portfolio, aimed at financing 64% of the scheme's liabilities as well as 2% long-term inflation.

The 86% core-matching portfolio returned 12.6%, mainly due to the pension fund's "limited" investments in Spanish, Italian and Belgian government bonds, it said.

However, it also noted that, following the downgrading of Spain, it decided to cap its exposure to countries with low credit ratings to 7%.

The pension fund's €4.4bn return portfolio – meant to finance the remaining liabilities and indexation, and safeguard against financial shocks – generated 11.4%.

This was mainly due to returns on equity (15.5%), high-yield credit (15.6%) and emerging market bonds (13.3%).

Investments in property and commodities returned 2% and -1.1%, respectively, over the period.

Last year, the pension fund continued its divestment programme for in-house managed direct real estate holdings, in favour of indirect non-listed investments, managed by Aviva.

It increased its stake in property funds by €90m to €140m, almost one-quarter of the planned portfolio scale.

The Philips scheme attributed the 0.8% underperformance of the return portfolio to defensive positions in high-yield credit, as well as the spread of its emerging market paper.

The board said it delayed the planned increase its liability-matching holdings to 70%, "as this would come at the expense of the return portfolio and would decrease the options for indexation and recovery as a result".

It also decided to stick to its full currency hedge for investments in developed countries, while reducing its currency cover for emerging markets to 0%.

The pension fund reported asset management costs of 0.25%, and added that transaction costs were 0.09% and administration costs €140 per participant.

The scheme refrained from granting indexation, after its board decided it would only compensate for inflation if funding was at least 107%, equating to the minimum required financial buffers.

The pension fund has 14,670 active participants, 59,720 pensioners and 33,095 deferred members.

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