Pension funds are preparing to move to a defined contribution model in the Netherlands, ahead of a mandatory switch on 1 January 2028. They are required to share their transition plans by the end of January 2025 with the Dutch central bank, De Nederlandsche Bank (DNB), and by July 2025 will need to share their implementation plans for the process.
In a new research note, Sphia Salim, rates strategist at Bank of America observed that DNB’s latest data release indicates Dutch pension funds appetite.
“[They] have either stabilised or increased their interest rate hedges in the third quarter of 2024 (Q3 2024),” she writes. “This is consistent with the desire to protect their financial position against lower rates ahead of their transition to the new Defined Contribution system. This likely continued in Q4 2024 via receiving in long-dated swaps, as suggested by the flattening in EUR 10s30s.”
Her firm’s assessment is that funds will need to balance the risk of pension cuts, should rates rally driving funding ratios below the minimum required on transition day and the risk of “excessive repricing” when they unwind long-end received positions.
“The largest ten funds would need to receive around €50mln/01 to all get to a minimum hedge ratio of 60%, and as much as €180mln/01 to get to all get to a min hedge ratio of 70% (Exhibit 1),” she says. “These amounts are 90% linked to the largest two funds (ABP which intends to transition on 1-Jan-27) and PFZW (with a target transition date of 1-Jan-26), both displaying a hedge ratio sub 60%.”
A State Street Global Advisor (SSGA) note, published in summer 2024, additional triggers for changing appetite.
“There are some changes that apply to all pension funds irrespective of the contract set-up,” they wrote. “The pension reforms will introduce so-called lifecycle investing. Lifecyle investing introduces an age-dependent portfolio. In short, the risk of the portfolio decreases with age and the allocation to the hedge portfolio will correspondingly increase. Also, the capital requirements framework will be abolished. This will have implications for the attractiveness of different investments, including those frequently found in pension funds’ hedge portfolios, because they do not require any capital to be held against them — e.g., AAA EUR government bonds.”
Pension funds should be able to support their rate hedging via the new issue market, BofA notes, considering historical capacity and appetite.
“In 2023 and 2024, we estimated that Dutch PFs absorbed €10mln/01 in long-dated EGB syndications over the first 7-8 weeks of Q1,” Salim writes. “We believe pension fund demand should provide support to the long-end of EGB curves and help EUR yields reconnect with fundamentals. This should make long positions worth revisiting.”
