Dutch pension funds are getting more daring. Having discovered they can afford to take more risk they are immersing themselves in equities. A bout of solvency studies has persuaded many to prise themselves away from the traditional security of bonds.
The privately funded pensions industry, like that of the UK, is one of the few in Europe that has had time to develop; funds managed per capita are Europe’s highest. But unlike in the UK asset allocation has been weighted heavily towards fixed-rate securities.
This has already started to change. At the end of 1995, Dutch pension funds held 29% of assets in equities and 58% in fixed interest, according to The WM Company (see chart). Cees Westland, of WM in Amsterdam, says stock weightings have grown from around 20% 10 years ago. 1996 figures will probably show funds fattening equity weightings still more, he adds, due to high market returns.
But the difference in asset allocation habits between Dutch pension funds and their British counterparts - which typically have 80% of their assets in equities - is fast disappearing, says Luc ten Cate, head of European operations for US consultant Wilshire in Amsterdam. We are tending to move towards each other, and we will end up at the end of the century with a 50/50 approach … probably Dutch funds will end up higher in equities.”
The Dutch stock market has boomed over the past few years, but pension funds are still far heavier in foreign shares than domestic.
Last year, Dutch equities soared to yield a total market return of 39%. Over the past 10 years, the compound growth of the index alone, excluding dividends, has averaged a respectable 10.8% a year. But pension funds refuse to be lured, and are thoroughly diversified into foreign stocks.
Some funds are already heavily into equities. One major Dutch fund has its benchmark strategic portfolio at 60-65% equities, ten Cate says. Another is underfunded and therefore much lower than the average.
Like most industrialised nations, the Netherlands has to cope with a maturing population. But ten Cate says this is no reason to retreat to fixed-income securities. To meet growing liabilities funds will probably have to move even further in the direction of equities, he says. Pre-IPOs, venture capital and distressed securities could all become part of a pension fund portfolio.
Property has traditionally been popular. But Westland says this is shrinking as no new fund money has been going into the sector: partly because funds need greater liquidity, and partly because the market itself is changing. The trend towards smaller companies whose staff do not need to work in offices could hit commercial property prices, ten Cate says.
As for asset allocation decision-making, Dutch funds use a variety of methods. “They are quite quantitative-driven,” says ten Cate. Benchmark portfolios, once set, now tend to stay in place for three to five years, compared with 20 years in the old days. Fund managers employ tactical asset overlay to shift emphasis while the benchmark remains, using derivatives for temporary hedging.
“Asset/liability modelling is quite popular from a few years ago,” says Westland. Asset/liability studies done in the last few years spurred funds to swell equities weightings, says one member of an investment team at a major Dutch pension fund. But in the near term he believes equities weightings will remain stable.
“Unilever, Shell and PGGM are already at their target weightings,” he says, though they may want still higher weightings in the future. He is among those who caution against the headlong rush to equities. “Personally, I think it’s a somewhat dangerous development that’s taking place. Everyone’s so keen on equities that they don’t see any risk.””