Dutch pension funds are expected to reduce their investments in investment-grade credit, as many funds will move them from their matching portfolios to their return portfolios in the new defined contribution (DC) pension system.
Most pension funds have chosen the so-called solidarity arrangement in the new pension system, whereby a pension fund’s assets will continue to be managed collectively.
To still distinguish between age cohorts with different risk profiles, pensioners will be given a higher exposure to a matching portfolio, providing them with a stable pension that is resistant to interest rate shocks. Active members, however, will be mostly or even entirely exposed to a return portfolio.
Currently, most pension funds have included corporate bonds and mortgages in their matching portfolios, alongside government bonds and swaps. But for funds that have chosen the solidarity arrangement, this will change in the new pension system, according to Carl Kool, a director at BlackRock.
Risk-free rate
Kool noted that many pension funds will no longer have room for investment-grade corporate bonds in their matching portfolios as returns must more tightly match those of the risk-free rate. In the new pension system, most pension funds will automatically assign the return of the risk-free interest rate curve to their members.
“Corporate bonds have a spread over government bonds. Movements in that spread can lead to a significant deviation between the return of the matching portfolio and the risk-free rate. That is why pension funds prefer not to include them in their matching portfolios anymore,” he said.
Holland Casino
An example of a fund that has removed its investment-grade credit from its matching portfolio is Holland Casino, a so-called ‘circle’ in the pooled pension fund Stap.
Holland Casino’s mortgage and investment-grade bond portfolios will move from its matching portfolio to its return portfolio on 1 May, when the fund will convert defined benefit (DB) accruals to its new DC arrangement.
The weight of investment-grade corporate bonds and mortgages will also be significantly reduced, by 11.3 and 9 percentage points, respectively, because of their relatively low expected return, said Huub Popping, board member of Stap.
Exposure to high-yield and emerging market debt will instead increase from a total of 4% now to 16.6% in the new arrangement.
BlackRock’s Kool also sees pension funds reducing their exposure to investment-grade bonds for this reason.
“In itself, they offer a nice diversification, but other investments provide higher returns. I see that the weight in investment-grade corporate bonds is falling for various funds that prefer to opt for investments with a higher expected return,” he said.
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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