Pension funds in the Netherlands have considerably more money in current accounts, money market funds and short-duration bonds compared to several years ago, according to figures published by pension regulator De Nederlandsche Bank (DNB).
Pension funds feel higher liquidity needs because of their derivative investments in, mostly, interest rate swaps. The money serves as collateral that funds have to deposit to counterparties if interest rates rise. Through interest rate swaps, funds protect their funding levels against large interest rate fluctuations.
Interest rate hedging has increased markedly in recent years, due to rising interest rates and an increased need for protection in the run-up to the transition to a defined contribution (DC) system.
Since 2021, market interest rates have risen and derivatives contracts have fallen in value. As a result, the contracts have turned into a liability on pension funds’ balance sheets, requiring them to post collateral to counterparties.
Margin accounts
Responding to this, pension funds are holding more money in so-called margin accounts. The balance of these margin accounts increased from -€92bn at the end of 2020 to €93bn at the end of September 2023. Last summer, this amount had declined to around €60bn as market interest rates had fallen somewhat again.
Pension funds are not only keeping more money in current accounts, however. They are also investing more in other short-term assets: corporate and government bonds and money market funds with a maturity of a few days to several months.
Short duration assets, comprising the balance of money in margin accounts and other short-term products, rose from €0 at the end of 2020 to €160bn at the end of June 2024. This is some 10% of funds’ total assets.
According to DNB, the increase in short-term assets, at the expense of better-yielding investments in, for instance, equities, bonds and illiquid investments, risks negatively impacting returns in the long run.
This article was first published on Pensioen Pro, IPE’s Dutch sister publication. It was translated and adapted for IPE by Tjibbe Hoekstra
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