PNO Media manages the pension scheme for some 300 companies and institutions in the media sector. The assets under management are approximately EUR 2.6 billion.
The Challenge
In mid 2004, negative equity returns and falling interest rates placed the funding ratio of the pension fund under severe pressure. The risk that the ratio would fall further prompted the formulation of a derivatives strategy.
The Approach
Following the ALM study conducted by Cardano, PNO Media decided to adopt two risk-reduction steps. The nominal interest rate risk for the pension fund was largely hedged using interest rate swaps. A custom-made put-option strategy was also implemented to hedge the equity risk. By protecting against extreme risks only, it was easier to benefit from the favourable developments expected to occur in the equity markets.
After the equity markets recovered, a large portion of the swaps was converted into swaption collars. This has enabled PNO Media to pursue a dynamic strategic risk policy.
The Success Factors
Close co-operation between PNO Media and Cardano ensured that optimal use could be made of the available risk budget. Through meticulous risk monitoring, swift decision making and the cost-effective implementation of the dynamic strategy, the PNO Media pension fund was able to achieve a strong improvement in its situation within the space of two-and-a-half years.