THE NETHERLANDS- Dutch pension funds are taking an increased interest in inflation linked products as a means of hedging against the risk associated with the country’s increasing rate.
Last month MN Services, Shell pension fund and Inflation Exchange Fund struck a real estate deal giving MN cover by guaranteeing an income stream linked to inflation.
PGGM, the e52bn Dutch fund for healthcare and social workers, is considering investing in inflation-linked bonds and the e150bn ABP fund’s alternatives unit is looking, among other things, at property overlay strategies.
Hoogovens, the e4.5bn corporate fund considered these inflation linked strategies in its latest ALM study as a means of enhancing the balance between assets and liabilities.
Head of investment Jelles Van As says they decided against introducing the strategies, one of the reason being that it was too expensive to do it OTC. “We considered it but decided to keep the risk and hedge it ourselves.”
According to Marko van Bergen, head of Benelux institutional business at Barclays Global Investors in Amsterdam, many pension funds are reviewing their asset mix and their ability to continue to meet future liabilities.
He says that funds now consider inflation to have a greater bearing on the liability side. “We’ve recently seen more interest in commodities and also inflation linked type of deals,” he says.
Poor equity returns and an inflation rate pushing 5% has led to a divergence in assets and liabilities and a deterioration of the financial health of many of the country’s pension funds.
Industry wide funds are due to publish their Z scores at the beginning of next month, something that will attract considerable attention.
Says van Bergen: “the Dutch pension fund market has historically been very rich but at the moment there is an awareness that it can turn around very rapidly.
"If you have inflationary pressure on your liabilities combined with falling markets you can suddenly have big gaps. A lot of funds have begun looking at their asset mix in the last six months.”
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