Dutch pension funds may not increase risk during pension transition | New

Dutch pension schemes will soon be allowed to increase investment risk in anticipation of the transition to a new pension fund system under which they no longer need large buffers. However, experts believe that most pension funds will not immediately use the opportunity to increase risk.

Pension transition opens a window of opportunity for pension funds to increase investment risk, according to the explanatory memorandum to the new Dutch pension law.

But a pension fund cannot do this immediately because it must first meet a series of conditions. It can take at least a year for a fund to get there, said Erik Beckers of pension consultancy First Pensions.

One of the conditions that pension funds must meet before they can increase risk is to measure the risk appetite of their members.

“For this reason, a pension fund that wants to move to the new system in 2024 can only start anticipating by 2023. In addition to measuring risk appetite, an ALM study is also needed,” Beckers said. , adding: “You must also assess whether a change in the investment policy does not disadvantage certain age groups.

Young versus old

In practice, this will be difficult to avoid. After all, the increased investment risk mainly benefits young people, while the decision to protect funding ratios – as some pension funds are already doing – is in the interests of retirees.

Until the transition to the new system is made, returns also cannot be attributed to specific groups within a pension fund, said Jens van Egmond, head of client strategy LDI Country- Down at BlackRock.

He said: “You can buy more shares at the fund level and increase risk that way, but I expect most pension funds to make the transition first and only adjust their policy. investment only after.”

How much pension funds will actually increase risk once freed from regulatory constraints, however, remains a question.

“Would the average pension fund allocation to equities really be higher than it is now, once the consequences of pension reform crystallize by 2030? have the most influence on investment policy. These are older people who will want to keep a large exposure to bonds.

Photo Erik Beckers


Beckers doesn’t expect any big immediate changes either. He said: “But the rules on compulsory stamps have certain peculiarities. For example, taking a currency risk is currently considered an additional risk. But you could say that currency risk is not rewarded in the long run and therefore it doesn’t make much sense to hedge against it. Illiquid investments and inflation-linked bonds also take on more risk budget than might be considered logical.

According to Beckers, pension funds will consider reducing their currency hedging, increasing inflation protection and adding illiquid investments.

“But the question is whether they will already act during the transition. For example, illiquid investments such as private equity come with upfront costs that take time to recover, so they may very well choose to wait until after the transition.

Funds will also remain focused on their funding ratio for the time being, which will make many hesitant to increase risk. “If a pension fund decides to take on more risk and markets aren’t performing well just before the planned transition, then it may have a problem.”

But Martin Sanders, head of pensions at AXA Investment Managers’ Dutch office, believes that pension schemes will increase their investment risk as soon as possible.

“Many pension funds have wanted to do this for a long time, but have been unable to due to the strict rules that govern their investment policies,” noted Sanders, who is also critical of the “strange” features of some rules.

“Inflation protection is seen as an additional risk, which of course is a little strange. I expect pension funds to take the opportunity to optimize their portfolios once the current financial rating framework is invalidated. In practice, this means that they will increase the risk.

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