NETHERLANDS – The average Dutch pension fund has hedged almost half of the interest risk on its liabilities, according to a recent survey by regulator De Nederlandsche Bank (DNB).

As a result of this cover (48%), a drop in interest rates of 1% would cause a 7.8-percentage-point drop in coverage ratio, rather than 14.9 percentage points, it said.

According to the DNB, Dutch pension funds have largely left their interest hedges as is since the introduction of the ultimate forward rate (UFR) as the new discount criterion in September 2012.

With the application of the UFR, it said, the interest cover would be 37% – the level recorded in early 2011.

The DNB also found that coverage ratios grew by approximately 5 percentage points on average after the discount rate increased in the wake of the UFR's introduction.

By the same token, funding volatility decreased following interest changes.

Pension funds have largely hedged the interest risk on their liabilities using government bonds and interest swaps.

The regulator estimated that, in the event of a 1% decrease of the interest rate, the value of government bonds and swaps would increase by €19bn and €44bn respectively.

The DNB said it was up to the individual pension fund to determine how much interest risk it wished to hedge.

It said its task was to ascertain whether a scheme's hedging policy was sound, and whether it managed interest risk sufficiently.