NETHERLANDS - The €6.5bn pension fund for the core of KLM's flying staff has decided to introduce private equity as new asset class to improve its return options.

To minimise risk, it will limit the allocation to 4%, set strict quality requirements for the investments and "adequately" staff the investment team, it said in its 2011 annual report.

The scheme has also decided to invest part of its 39% equity portfolio in defensive strategies.

The Stichting Pensioenfonds Vliegend Personeel reported a return of 3.6% and a funding ratio of more than 122% at year-end, allowing it to grant a full indexation of 1.4% for 2012.

The pension fund said it had hedged 75% of its equity risk through Average Priced Options, which contributed 0.1% to the investment result of -9.5%.

It added that North America was the best performing region, with large caps generating a positive return, albeit a small one.

The scheme's fixed income portfolio of more than 54% returned 11.9%, with its investments in global inflation-linked bonds delivering the best results.

Dollar-denominated emerging market bonds returned 7%, whereas local currency-denominated government paper produced a loss.

The KLM scheme's property holdings returned 0.3%.

The fund said it had also established a risk and control committee, which monitors the internal management as well as pension provision and asset management, which has been outsourced to Blue Sky Group.

It added that it had extended its contract with Blue Sky last year.

The pension fund said had fully hedged the risks on the main foreign currencies.

Meanwhile, the scheme saw its coverage ratio fall to 117% during the first six months of 2012, due to falling long-term interest rates.

However, its funding is still above the required financial buffers, equating to 116.5%.

The Pensionfonds Vliegend Personeel has 2,780 active participants, 155 deferred members and 2,245 pensioners.

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