Leave asset mix to pension funds
Despite Kees van Dijkhuizen’s conclusion that there is support for increased involvement from Dutch institutional investors for financing residential mortgages through state-guaranteed bonds, the IMF seems to have vindicated pension funds’ initial reluctance.
Pension funds, they say, must focus on what they are supposed to do, which is to generate stable and sustainable returns for their participants, not help banks plug funding gaps so they can ease lending conditions and kick-start the housing market.
Van Dijkhuizen, vice-chairman at investment bank NIBC and a former top civil servant at the Dutch Treasury, recommended moving part of the least risky mortgages – estimated at €150bn – to a national institution called the NHI, which would issue government-backed mortgage bonds called NHOs. This would provide pension funds with “very liquid bonds”, while banks would get better financing conditions on the capital markets for their guaranteed mortgages, he argued.
Referring to the international securitisation market, which seized up at the start of the financial crisis, he foresaw a “very robust” financial instrument that would “remain upright during periods of stress”. In his opinion, the positive sign of Dutch institutional investors investing in NHOs would encourage foreign players to follow. Increased competition could even drive down interest on mortgage interest rates.
Dutch households hold mortgages totaling €650bn offset by €375bn of savings. Combined with a corporate debt of €355bn against €155bn of deposits, the total funding gap is €460bn. Since 2008, house prices in the Netherlands have decreased on average by 19%, and 25% of mortgages are in negative equity.
However, in its newest assessment of the Netherlands, the IMF warns that pension funds must manage their assets independently, and “need not be provided with any additional incentives to alter their asset allocation process”. It added that natural adjustment of the overvalued house prices should proceed unimpeded, and that the risk from exposure to the real estate sector be priced transparently.
The IMF stresses that, given Dutch exposure to falling real estate prices and a reliance on wholesale funding, ensuring the resilience of the banking system should be a top priority.
But, rather than involving pension fund assets – worth more than €900bn and accounting for 160% of GDP – banks should reduce their exposure to the property sector by issuing common equity from private sources as well as higher retained earnings.
It acknowledges that the government has taken steps to reduce pro-cyclical elements and volatility in the pensions system through the introduction of the ultimate forward rate as the discount rate for liabilities, increasing recovery periods and smoothing rights cuts, as well as preparing a new pensions contract.
Given the scale of the mortgage debt, the question is whether Dutch schemes can have an impact on reducing banks’ mortgages burden. Even if the 10 largest schemes invest 15% of their assets, the funding gap would fall by just 10%.
The DNB’s statement didn’t go unnoticed by Angelien Kemna, CIO at the €329bn asset manager APG. “A 15% allocation would make me nervous because of the concentration,” she said in October. However, she indicated that government-backed residential mortgage bonds would be her preferred option, if APG were to increase its portfolio of mortgage-related assets.
The €134bn healthcare scheme PFZW divested its mortgage portfolio in 2008, as it did not generate sufficient returns. That said, director Peter Borgdorff has made clear that the pension fund is prepared to take responsibility by reinvesting, provided the risk/return ratio is right. “Investing for PFZW’s participants, rather than saving the banks, would be our priority.”