NETHERLANDS - The €3.6bn pension fund of telecoms provider KPN limited its loss in 2008 to 14.5% as a result of a 70%-hedge on its interest rate risk, but officials have plans to increase its alpha risk this year.

The hedge through interest rate swaps contributed 7.7% to the scheme’s returns and added 10.8% to its cover ratio, reported the Stichting Pensioenfonds KPN, and the scheme replaced its long-term interest swaps by 15 and 20-years swaps at the end of the year in order to increase the connection to the pricing of the applied interest level.

Its overall returns were still 2.6% short of the benchmark, mainly because the underperformance in commodities and hedge funds investments, which contributed to a negative return of 35.2% on the alternatives portfolio.

The pension fund’s 36.5%-equity allocation returned -41.6%, whereas its 44.8%-fixed income portfolio delivered a positive return of 0.9% in 2008, when long-term government bonds returned up to 10.4%.

Despite its losses in equities and alternatives, the scheme said it will gradually adjust the investment mix to deliver a strategic equity allocation of 41% and a fixed income goal of 40% during 2009. In addition, it will increase its 3%-commodities allocation by 2%, at the expense of its hedge funds investments.

The pension fund has also decided to end its 3% investment in global tactical asset allocation (GTAA), as the practice “contributed insufficiently to the scheme’s returns during the past three years,” according to the scheme. GTAA returned -0.6% for the KPN scheme in 2008.

KPN’s pension fund has fully-hedged the currency risks of its equity and alternative investments in US dollars, sterling and yen, while it has largely covered its currency risks in its fixed income investments in euros.

Officials said they found active asset management does mean  added value in the ‘longer term’, as the costs of passive management are not included in the benchmark.

However, the losses mean the cover ratio of the KPN scheme had dropped from 139.4% to 93.1% at year-end, forcing the scheme to draw up recovery plans for both the short-term and the long-term.

As part of its recovery efforts, the pension fund will raise its dynamic and costs-covering contributions from 15.1% to 21%, and the employer has promised an additional contribution of a maximum of €360m during the next four years, as previously suggested. (See earlier IPE story: KPN to plug €390m pension funding gap)

KPN’s pension provider is TKP Pensions and its assets are managed by TKP Investments.

The Pensioenfonds KPN has 18,200 active participants, 21,200 deferred members and 11,500 pensioners in a hybrid scheme combining an average salary and defined contribution arrangement.

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