Many Dutch pension funds increased their interest rate hedges in 2021. On average, funds increased their interest rate hedge by another 2.5 percentage points after a similar rise in 2020, according to data published by pension regulator DNB.

An example of such a fund is APG Personeelspensioenfonds, the pension fund of the Netherlands’ largest pension provider APG. In February 2021 it increased its interest rate hedge by five percentage points to 35% after the 30-year euro swap rate “had hit the trigger of 0.23%,” said Tinka den Arend, a trustee at the fund.

She added: “Recently we hit another trigger as the interest rate rose above 0.73%. As a result we increased our hedge by an additional five percentage points to about 40%.”

At the end of 2020, the fund’s interest rate hedge stood at just 28.2%.

Some 45 pension funds increased their interest rate hedge by more than three percentage points last year. Many of these funds have a so-called dynamic interest rate hedge: according to this policy, the interest rate hedge increases automatically if market rates rise, as was the case last year.

Other funds, such as Pensioenfonds Huisartsen, reduced their interest rate risk last year because of a considerable improvement in their financial position.

Huisartsen, the fund for general practitioners, increased its interest rate hedge automatically after the fund’s funding ratio had risen above a certain trigger, the fund’s chief investment officer Pieter de Graaf told IPE.


Pension funds with a dynamic hedging policy reduce their interest rate hedge when interest rates fall and increase if these rise. However, quite a few funds increased their hedge both in 2020, when rates fell, and in 2021 when they rose.

Philips Pensioenfonds is such an example – after a slight increase in 2020, it almost doubled its hedge in 2021 to 111.7%. According to the fund’s CIO Anita Joosten, the move was part of the fund’s decision last year to reduce overall risk in order to protect its funding ratio in the run-up to the switch to a defined contribution (DC) system.

The interest rate hedge was increased to more than 100% because Philips has a real instead of a nominal pension ambition, meaning it intends to index pensions each year.

The same goes for a number of other company schemes, including IBM and ING. Both of these funds also considerably increased their interest rate hedge last year, partly as a result of higher inflation. IBM has the highest interest rate hedge of all funds, at 147%.

Interest rate hedge in %
Pension fundQ4 2019Q4 2020Q4 2021
IBM Nederland 126.5 125.2 147
ING 96.2 102.9 128
Philips 57.5 61.8 111.7
KPN 34.7 49.9 69.2
Dierenartsen 47.1 45.2 57.1
Shell 37.4 21.8 59


KPN Pensioenfonds increased its interest rate hedge by more than any other fund over the past two years, doubling it to almost 70%.

One of the considerations of the fund in doing this was its desire – like the Philips fund – to protect its buffer in the run-up to the pension transition, said Jaap van Dam, responsible for risk management and investments at the fund.

Last year, KPN’s funding ratio increased further to 129.1% in October.

“This made us decide to conduct another ALM study which showed us we can make sufficient returns with a higher interest rate hedge until we make the transition to the new pension contract,” said Van Dam.

The actuarial interest rate for an average pension fund has doubled in the past two years to about 0.73%, according to consultancy Sprenkels & Verschuren.

As a result, the pension funds that increased their interest rate hedge over this period did not do themselves a service in doing this: if they had kept their interest rate hedges at previous lower levels they would have had a higher funding ratio.

But at KPN they don’t regret their decision to increase their interest rate hedge. Van Dam said: “We do not have a view on interest rate developments, and do not see hedging interest rate risk as a source of return.”

The recent increase of the hedge to 69.2% will, however, likely be the last one until the fund transitions to the new pension contract. “We opted not to increase our hedge further because of the rise in inflation. Interest rates tend to move sort of in tandem with inflation,” said Van Dam.


“If you expect inflation to coincide with interest rate rises, then you may indeed want to increase rather than decrease your interest rate risk,” noted consultant Bertjan Kobus of Sprenkels & Verschuren. “After all, not fully hedging your interest rate risk can provide cushion to the funding ratio if equity markets crash.”

The latter scenario does not seem entirely improbable as many observers expect Europe to be hit by a recession after Russia’s invasion of Ukraine. Instead of further increasing their interest rate hedge, pension funds could also consider using swaptions, according to Kobus.

This instrument still protects against rates falling below a certain level while at the same time providing the opportunity to benefit from interest rate rises. Swaptions have also become less costly because interest rates have risen, he said.

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