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The €2.8bn pension fund of insurer Delta Lloyd has reduced its interest swap holdings, as their increasing value posed “substantial counterparty risk” to the scheme.Director Theo Krekel, delivering the pension fund’s 2014 annual report, said: “As interest rates continued to slide, the swaps’ value at year-end even exceeded their level in January.”As a consequence, he said the scheme was still looking for the “right long-duration bonds” to further reduce the size of its swaps holdings, which accounted for approximately 8% of assets, as of the end of last year. Initially, the Delta Lloyd Pensioenfonds increased government bonds while extending the duration of its existing holdings in government paper, to offset the hedge reduction following the divestment of swaps. Last year, the pension fund switched from a fixed 90% interest hedge to a dynamic one – covering 85-95% of the interest risk drawn from the swap curve – through a combination of fixed income investments and swaps.Delta Lloyd attributed the annual return of 27.7% in 2014 chiefly to the effect of falling interest rates on its 71% matching portfolio.This portfolio, which produced a return of nearly 34%, outperformed its benchmark by 5.6 percentage points. By contrast, the scheme’s return portfolio, consisting of equities and real estate, returned 8.8% over the period, underperforming its benchmark by 2.1 percentage points. Equities returned 10.2%, underperforming by 2.3 percentage points. The pension fund cited depreciation in investments funds covering parking garages, offices and retail property as the cause of the 2.2% loss on its 2% property allocation. Delta Lloyd reported asset management and transaction costs of 0.12% and 0.10%, respectively, and attributed the 7-basis-point increase in the latter to the reduction of its swaps holdings.Because the pension fund’s contracts for pensions provision and reinsurance are due to expire at year-end, it indicated it was “considering its future”.It suggested that extending its reinsurance contract was likely to be an “unattractive” option, given the expected high costs resulting from low interest rates. The official policy funding at the Pensioenfonds Delta Lloyd stands at 130.1%, equating with a coverage in real terms of 95%.At year-end, the pension fund had 4,310 active participants, 5,495 deferred members and 3,380 pensioners.