Pension fund for painters pays price for cutting back interest hedge

Schilders, the €6bn sector pension fund for painters and decorators in the Netherlands, saw its funding drop by 5.6 percentage points after it reduced the interest hedge on its liabilities from 75% to 25% in July last year.

After interest rates – the criterion for calculating liabilities – slid from 1.6% to less than 1%, the scheme’s coverage ratio fell from 104.1% to 94.2% over the first six months of 2016, according to its 2015 annual report.

Had the pension fund stuck with its initial hedging policy, its funding would have been 99.8% at present, it told IPE sister publication Pensioen Pro.

Schilders said it based its decision to cut the interest hedge on the assumption that interest rates were extremely and artificially low.

At the time, it estimated that the negative impact of further rate cuts on its funding would be much less than the positive effect of rate increases.

Cathrin van der Werf, the scheme’s chair, said that, with the “deliberate” decision to reduce the interest cover, the pension fund had accepted the risk of rising interest rates.

She said the board’s policy had enjoyed the support of the scheme’s participants, who accepted the higher risk of rights cuts if the chances of indexation were improved.

She added that the pension fund still believed the reduced hedge offered greater potential for indexation over the long term.

“The European Central Bank can’t continue forever with its policy of quantitative easing as an important cause of the current low interest rates,” Van der Werf said.

She added that the pension fund intended to increase the interest hedge when rates set to rise again.

With its decision to reduce the interest cover, the pension fund said it had taken advantage of the one-off opportunity offered by regulator De Nederlandsche Bank for sufficiently funded pension funds to raise their risk profiles.

Schilders also increased its credit allocation by 10 percentage points, reduced its full hedge of US dollar risk to 70% and divested its small commodities portfolio.

As a result of these adjustments, its required funding increased from 121% to 125.4%.

The pension fund has 113,000 participants and pensioners.