NETHERLANDS - Dutch pension funds’ affair with equities - both domestic and foreign - is over, according to research by bankers Kempen in Amsterdam.
With the post-euro moves to international diversification complete, the main trend ahead is the ongoing shift from private into listed debt and from direct into indirect property holdings.
In the past two years, pension funds poured new money into equities as stock markets declined, in an attempt to maintain their strategic equity allocation. Funds have only recently given up these attempts, says Kempen analyst Peter van Doesburg, looking at the shifting investment behaviour of Dutch funds, in a strategy research paper.
Their exposure to equities peaked at 50% allocation, but declined last year to nearer 40%. There was a positive inflow into equities for the first three quarters of last year, which reversed in the last quarter. “Pension funds have apparently become increasingly aware that it is not manageable in the current equity bear market to steer the equity allocation towards the desired strategic levels.”
The drop in equity prices has resulted in a vast deterioration in the average solvency of funds. “According to our estimates the average coverage ratio of Dutch pensions currently hovers at around 100%,” says the research. According to pensions regulator the PVK, of 1,000 funds in total 300 are underfunded when the Dutch AEX equity index is at 300. At an AEX level of 285, Kempen reckons the aggregate underfunding of these 300 funds is 25 billion euros.
With the PVK’s tough new rules for equity buffers, the trend to allocating new pensions money into equities will not be maintained at past levels, Kempen reckons. The incentive will be to buy fixed income assets instead. As part of an ongoing move to liquid assets, funds will concentrate their debt portfolios on listed assets.
According to Kempen, the listed proportion has increased from around 50% in 1996 to over 80% at the end of last year. “Pension funds are increasingly focussing their efforts on investing in capital markets only.” Listed property assets have moved from 20% of property portfolios in 1996 to over 50% five years later. This trend is likely to be stepped up in the future, it says.