The TNT Pension Fund was looking for ways to better protect its pension plan from the negative effects of highly volatile interest rates. TKPi, an AEGON company identified ‘swaptions’ as being a useful and effective solution.
As a result of the financial crisis, in 2009 TNT increased the pension contribution it was paying into its pension fund. ‘Raising the contribution was one way of making sure that we could continue to protect our employees’ pensions,’ says Huub Popping, Chairman of the Board of Trustees of the TNT Pension Fund. ‘At the same time, we were also eager to protect our pension fund from the risk of any further reduction in funding ratio. We wanted to make sure that TNT wasn’t going to have to make additional payments into the plan in times of hardship but we also wanted to ensure that our participants’ pensions would still be able to grow in better times. In other words, we were looking for protection, but we didn’t want protection that would reduce our potential for growth.’
From interest rate swaps to swaptions
Using interest rate swaps, the TNT Pension Fund had covered 75% of its interest rate risk. This meant that the pension fund was not fully protected against decreasing interest rates, but it did allow it to benefit for a small amount from any rises in interest rates.
‘The problem with swaps is that they offer protection at the cost of growth within a nominal but also real context,’ says Roelie van Wijk, chief executive officer of TNT’s asset manager TKPi. ‘By buying options on interest rate swaps instead – or ‘swaptions’ as they are called – this disadvantage is removed. Swaptions can remove the downside risk of interest rate volatility,but allow pension funds to benefit from the upside potential.’
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