NETHERLANDS – ABN Amro expects Dutch pension funds to move to a higher bond allocation – driven by regulatory factors and the change to a fair discount rate.
The bank says the shift in portfolios could result in around 24 billion euros of extra bond market demand.
“A perfect storm scenario is building for the longer end of the yield curve,” said ABN Amro fixed income strategist Harvinder Sian.
“New Dutch solvency regulation for pension funds will increase risk aversion and also trading up the euro curve. This will be compounded n the medium term by steadily increasing demand for longer term government paper from French and German pension funds.”
The bank has issued a 42-page report on the bond market impact of pension reform entitled “Rates, pension regulation & reform”.
“Our expectation is that pension funds will in practice move towards a mildly lower stock allocation and higher bond market allocation as a result of regulatory factors and the movement to a fair discount rate,” the report argued.
“Moreover, the solvency conditions whereby the risk of underfunding should not exceed between 0.5% and five percent one-year ahead is likely to constrain the room for
pension funds to take on extra risk, even if the higher return is desired in the medium term.
“Finally, to put some numbers on the possible scale of bond market inflows, a five percent shift from risk assets in to bonds would translate to approximately 24 billion euros extra in bond/swaps market demand flow.”
The report said: “The UK and Danish experiences are obvious reminders. Going forward, we expect the evolving Dutch pension regulations to trigger long end EUR richening. This is a story for 2004. Funded pension reforms in France and Germany will work an impact on the curve more slowly.”