Most Dutch pension funds are planning to invest in long-term bonds and interest rate derivatives to comply with the new FTK rules, or financial assessment framework, according to a survey by merchant bank NIB Capital and Mercer Human Resource Consulting. Only a quarter of the schemes are considering deploying equity derivatives.
Ten percent of the 800 or so Dutch schemes responded to the survey. One of the main consequences of the FTK is that pension liabilities have to be based on market rates, instead of a fixed rate of 4%.
“The responding schemes consider the return and the duration by far the most important selection criteria, followed by credit rating, liquidity and inflation-linked character,” said NIB Capital’s director pensions business development, Jeroen Tielman.
“According to 50% of the respondents, the market can’t provide enough of such long duration bonds, but they expect market forces to correct for this. About a quarter expects the market to be seriously disturbed by the movement to the longer end.”
Half of all the respondents prefer an internally developed risks management model to the standardised one of the pensions regulator, the DNB.
“They expect to get a better view on the risks and a lower requirement for its financial buffer,” explained Ruud Smets, who developed the survey.
Over 50% expect the decision on whether or not to lengthen duration, will be taken in the first half of this year. A quarter has indicated that any lengthening will happen gradually.
A third of respondents think that
if interest rates drop further, they will be forced to lengthen duration – and at the least favourable moment.
Over two-thirds expect to have brought their duration to the preferred level before the end of 2006. They expect to complete the process within less than a year. Only 2% expect to need more than five years for this.

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