NETHERLANDS - Direct exposure of Dutch pension funds and insurers to the US sub-prime mortgage market is relatively limited, but pension funds with minimal hedge fund exposure may have made gains through the turbulence, suggests evidence from the regulator and pension funds.

Commenting in an overview of financial stability in the Netherlands, the financial regulator De Nederlandsche Bank said while it is believed there is limited exposure to the recent credit crisis related to the US sub-prime mortgage market, it may have created investment complexities elsewhere for institutional investors.

"The credit crisis has revealed some indirect ways in which the institutions might be infected. They include the need to take back credit risks from special purpose vehicles, and the inability of passing on private equity exposure," the supervisory body said.

According to DNB, pension funds and insurers play a role as investors in securitised assets, seeing credit risk as an alternative investment category so while, "at present, these investments are still modest, but there is a noticeable trend upward".

"The turmoil again draws the attention to the strong susceptibility of pension funds' coverage ratios to market developments, and thus on a prudent application of the new financial assessment framework FTK, in order to build adequate financial buffers during good times," DNB stressed.

Expanding on this stance, officials at ABP, the Netherlands' largest pension scheme valued at €221bn, said it has been able to take advantage of sub-prime turbulence through its indirect exposures.

"ABP has only indirect investments in the US sub-prime market through our carefully selected single hedge fund strategies, which have actually yielded attractive returns," said Thijs Steger, spokesman for ABP.

"Hedge fund managers have realised positive returns, because they have arbitrage positions between the different segments of the ‘less creditworthy' mortgage lenders," he explained.

PGGM's spokesman, David Uitdenbogaard, said the €86bn healthcare pension scheme, added its strategy means activity in relation to sub-prime debt volatility has been relatively limited.

"Although the present situation on the credit markets have also indirectly affected our investments in corporate bonds, the management of these investments is focused on loans to prime debtors. That's why the effect is relatively modest," said Uitdenbogaard.

"Moreover, PGGM's investment portfolio has a very wide spread, which makes us less dependent on developments of individual markets. The effects of the present developments in the credit markets fit within the volatility one may expect within a well-spread portfolio."

Pension funds' capital adequacy has continued to improve and is, on average, sufficient to cover their real liabilities now, DNB made clear.

At the end of 2006, no pension fund faced under-funding, and the number of schemes with a reserve shortfall has declined further to approximately 115, it said.

Half of the improvement since 2005 is accounted for by a rise in bond yields, illustrating pension fund balance sheets remain highly sensitive to interest rates, DNB added.

In the opinion of the supervisor, the marked recovery of many pension funds may offer them opportunities to (further) reduce their interest rate risks.

"Over the past few years, they have done so by extending the duration of their fixed income portfolios by a year on average," said DNB.