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Dutch hybrid contract won't affect investment policies – survey

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The so-called ‘middle way’ for the new Dutch pensions contract being hammered out by the government will have little impact on pension funds’ asset allocation, according to investment experts.

A large majority of investment professionals attending a conference held by IPE sister publication IP Nederland said the new hybrid contract would not lead to a more “aggressive” investment policy, even if pension funds are given more options for smoothing out rights cuts, as is expected.

Hans de Ruiter, head of investments at the €5bn pension fund of technical research institute TNO and a member of an IP Nederland discussion panel, said: “The new pensions contract is not meant to increase investment risks.”

Hedwig Peters, professional pension fund board member and also on the panel, fully shared his opinion, pointing out that “current legislation would still apply”.

Also during the conference, the audience showed no clear preference for the recently proposed new discount rate, which consists of an ultimate forward rate (UFR) of the average 20-year interest rate over the previous 10 years.

The new criterion is to replace the current discount rate of the three-month average of the forward curve as of 2015, when the new financial assessment framework (FTK) is scheduled to come into force.

Gerard Roelofs, head of investments for Continental Europe at Towers Watson, said: “The impact is not very different from the current discount rate.”

However, the expert panel was very pleased the three-month average would disappear from the discount criterion.

Both Peters and De Ruiter noticed that no financial instruments existed to hedge the interest risk on liabilities based on the UFR.

Therefore, pension funds should not adjust their current interest-matching policy because of the new discount rate, Peters argued.

Almost the entire audience agreed with her that market valuation of liabilities should be the guiding principle for pension funds’ investment policy.

A large majority of the audience also said they did not expect a hybrid pensions contract to lead to an increase of inflation-linked products in their investment portfolios.

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