NETHERLANDS – Dutch regulator De Nederlandsche Bank (DNB) has warned pension funds of the potential impact of sudden increases in long-term interest rates.

Aswin Bouwmeester, supervisor at the DNB, said this scenario, triggered by an improving economy and a subsequent wave of equity investment, could hurt pension funds "significantly".

Many Dutch pension funds have hedged the interest risk on their liabilities using interest swaps, which has boosted their assets substantially in recent years, due to falling rates.

But Bouwmeester, speaking during the IIR-conference in Amsterdam this week, chided pension funds for touting their growing assets in order to negotiate a more favourable discount rate for liabilities.

"If interest rates rise again unexpectedly, this wealth could disappear as quickly as it has been accrued," he said. "These additional assets are actually insurance money against interest rates movements."

Separately, in a clarification of the DNB's new supervisory framework – focusing on risks rather than on compliance – Bouwmeester said the regulator would now pay much more attention to the expertise and suitability of pension funds' boards, as well as to how they evaluate themselves and carry out plans for accruing expertise and succession.

He said the "culture" at a pension fund would be a new criterion for supervision.

"For example," he said, "we assess whether there are dominating personalities at the sponsoring company who also exert influence at the pension scheme."

He also said the "intensity" of supervision would now depend on a pension fund's scale, as well as on the risk identified within individual institutions.

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