NETHERLANDS - Pension funds must be aware of the liquidity risk while concluding contracts on interest swaps and other derivatives, pension regulator De Nederlandsche Bank (DNB) has warned.

A survey among 27 of the largest pension funds - covering 79% of Dutch pension assets - has suggested that not all of them have sufficient assets to comply with the collateral requirements, if their swaps' value were to decrease due to falling interest rates.

As they must discount their liabilities against the forward curve, most Dutch pension funds have hedged the interest risk on their liabilities through long-term bonds as well as interest rate swaps.

The DNB found that 20 of the surveyed schemes have sufficient AAA-rated government bonds to comply with the collateral requirements.

However, it stressed that the remaining pension funds might be able to provide collateral through cash.

The supervisor illustrated pension funds' susceptibility to interest rate movements by pointing out that their average coverage ratio of 109.1% at end-February, would drop by 10 percentage points following a decrease of the forward curve of one percentage point.

On the other hand, a rate rise of one percentage point will cause an increase of the funding ratio of 13 percentage points on average, it noted.

According to the regulator, the surveyed schemes haven't significantly changed their interest hedge during the past two years, and have kept their cover at between 35% and 40% on average.

The pension funds have fully hedged the interest risks on their assets for up to five years, while having hardly covered their assets with a duration of over 30 years, the regulator found.

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