De Eendragt Pensioen
The insurer De Eendragt Pensioen N.V. (or ‘De Eendragt’) manages the pensions of employees in a variety of sectors, including the paper industry. The assets of roughly 25 participating companies have been placed in two investment pools: one for active members and one for inactive members. The pools are divided into a matching portfolio that is intended to minimise the risk of underfunding and an investment portfolio that is intended to provide for contribution discounts and indexation.
The Challenge
The liabilities are more sensitive than the bonds portfolio to interest rates. If additional measures are not taken, there might be substantial and very rapid changes in the solvency of the funds. Furthermore, it is also the aim that the pensions should be index-linked. As our established partner in risk management, Cardano was asked to help develop a hedging strategy.
The Strategy
The matching portfolios are equally large as the liabilities and are comprised of bonds. The risk arising from duration mismatch has been hedged by means of a dynamic strategy, operating within a carefully considered risk framework, which offers scope to benefit from economic circumstances. Part of the inflation risk for the inactive members has been hedged directly using inflation swaps.
The Success Factors
The unique structure of De Eendragt required a high-end, custom-made solution. The parties co-operated closely to draw up an optimal investment policy, taking account of direct sensitivity to interest rates and inflation, while delivering a risk and return profile that would be desirable over the long term.