A] Prelude
For more information on pension systems, risk and coverage, feel free to visit our dedicated webpages:
https://expatpensionholland.nl/expat-holland
https://expatpensionholland.nl/global-pillars-systems
https://expatpensionholland.nl/global-investments-risks-0
https://expatpensionholland.nl/global-social-security-coverage
For even more information feel free to visit the following external sites:
https://www.pensioenfederatie.nl/website/the-dutch-pension-system-highlights-and-characteristics
https://www.dnb.nl/en/current-economic-issues/pensions/the-new-pension-system/
https://www.mijnpensioenoverzicht.nl/over?language=en
B] The Issue
Pension funds are preparing to move to an investment based Defined Contribution (DC) model in the Netherlands, ahead of a mandatory switch on 1 January 2028. They were 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 Sophia Salim observed that DNB’s latest data release indicates Dutch pension funds appetite.
“They have either stabilized or increased their interest rate hedges in the third quarter of 2024. 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.”
C] The Details
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%. 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 note published additional triggers for changing appetite. “There are some changes that apply to all pension funds irrespective of the contract set-up. 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.”