Three out of four Dutch pension funds that plan to transition to a new defined contribution (DC) arrangement have increased their interest rate hedges to protect their funding ratios. Only one fund has also reduced equity risk.
The staff pension fund for the pension asset manager APG temporarily reduced its equity risk at the end of November last year.
“With this, we lose some upside potential next year, but we consider this acceptable with a view to limiting the downside risk to the funding ratio,” the fund’s president Tinka den Arend told IPE at the time.
The APG staff fund currently invests less than 20% in listed equities, 13 percentage points less than the fund’s normal 33% strategic allocation to this category.
No to derivatives
The professional pension fund for shipping pilots (Loodsen), the pension fund for disabled workers (PWRI), as well as the grocers’ sector scheme (Levensmiddelen) are also moving to DC on 1 January. None of these funds have reduced their equity risk.
“We’ve had a big discussion about using strategies involving derivatives, but have concluded that the benefits do not outweigh the costs. We also have a bit more fat on our bones now. That makes additional risk hedging less of a necessity,” said Rajesh Grobbe, Loodsen’s director, referring to the scheme’s funding ratio of 125.3% (5 percentage points higher than at the end of 2023).
“Moreover, you cannot possibly hedge all your equity risk. After all, we invest not only in listed equities, but also in high-yield bonds and private equity,” he added.
PWRI also decided against deploying derivatives strategies. “This would have come with high costs and a complex governance structure,” said president Margreet Teunissen.
PWRI did, however, increase its interest rate hedge to 66% this year. Loodsen, as well as APG’s staff pension fund, even raised their interest rate hedge to 100% in two steps.
Waiting for DNB
The only one of the four frontrunners that has not taken any additional measures at all to protect its funding ratio is grocers’ fund Levensmiddelen. This is remarkable: at 11% (end of August), Levensmiddelen has by far the lowest funding ratio of the four frontrunners, and hence the greatest need for extra protection.
The fund’s president Erwin Bosman said the scheme had not yet implemented additional hedging interest rates and/or equities.
Whether the pension fund will still do so depends on whether and when it gets the green light from De Nederlandsche Bank (DNB) to move to the new DC pension arrangement, though “time would be short” to take any additional measures, Bosman added.
Levensmiddelen did increase its interest rate hedge from 35% to 60%, but that already happened in early 2022 and had nothing to do with the transition. At the time, the fund just had to cut pension benefits because of an insufficient funding ratio, and wanted to avoid having to do so again.
The timing of the increase in the interest rate hedge turned out to be unfortunate though: almost immediately after that decision, interest rates started to rise. Consequently, the pension fund’s funding ratio benefited less from rising rates than it would have if the fund had kept its hedging ratio unchanged.
This article was first published on Pensioen Pro, IPE’s Dutch sister publication
No comments yet