The funding levels of Dutch pension funds could rise if there are sudden changes to policies and technology related to the energy transition, according to the results of a stress test exercise run by De Nederlandsche Bank (DNB).
The Netherlands’ financial regulator said that policy intervention and technological developments affecting the move away from carbon-intensive energy production could cause interest rates to improve, in part as a result of rising inflation.
DNB examined four scenarios in its pension fund stress test: changes in policy, technological developments, a combination of the two, and change in stakeholder confidence.
A policy shock would occur if governments worldwide agreed on a combined policy to limit carbon emissions, DNB said, while a sudden change in technology would lead to falling costs of renewable energy, causing investments to rise strongly.
The “confidence shock” scenario entailed policy uncertainty causing a fall in the confidence of consumers, producers and investors.
DNB analysed pension funds’ allocations to equities and bonds and concluded that the value of investments would drop in all scenarios, and could be up to 10% in the “double shock” policy and technology change scenario.
However, as interest rates would increase, the shock would have a positive impact on schemes’ funding overall, said DNB. This would also happen in the event of a sudden policy change without the technology factor.
According to the regulator, the increase in funding levels could be almost 12% in case of a double shock and 10% for a policy change.
However, DNB emphasised that only nominal funding would improve, as the interest rate rise would in part be triggered by inflation.
“If pension funds decided to grant inflation compensation, coverage would fall in both scenarios,” DNB said.
The watchdog also found that funding would hardly change in its technological developments scenario, while coverage would drop 5.5% as a result of a fall in confidence.
The stress test was part of DNB’s six-monthly overview of the financial stability of pension schemes. The regulator warned that the ECB’s quantitative easing policy was also a risk to financial stability.