Dutch pension funds could lose up to 17 percentage points of their funding as a result of the energy transition, according to research by consultancy Sprenkels & Verschuren.

The consultancy conducted four stress-test scenarios built on earlier calculations from Dutch regulator De Nederlandsche Bank (DNB).

DNB concluded that funding levels could rise in the first year after a policy “shock” – whether through the government suddenly introducing strict carbon reduction measures, or with the addition of a technological breakthrough in sustainable energy – resulting in coverage ratios rising by 10-12 percentage points, primarily due to rising interest rates.

Sprenkels & Verschuren confirmed this outcome for the first year, but found that a subsequent fall in interest rates would pull down the funding of the average scheme with a 38% interest rate hedge position.

If a government policy change happened, schemes’ coverage would drop by 5 percentage points after five years, the consultancy found, while a policy change combined with technological developments (a “double shock”) could push ratios down by up to 12 percentage points.

A technology shock alone (defined as a breakthrough in green energy generation) would lead to a funding ratio decline of 11 percentage points on average. A hit to market confidence caused by uncertainty about government measures would cause a fall of 17 percentage points, Sprenkels & Verschuren estimated.

It said falling interest rates and declining equity markets later in its five-year forecast period would negatively affect the coverage ratio.

DNB had foreseen a positive result of 0.6 percentage points after a year in the technology “shock” scenario, while the market confidence scenario was estimated to cause a loss of 5.5 percentage points.

Sprenkels & Verschuren found that both the policy-related shock and the double shock scenarios would lead to a decline in pension outcomes over a five-year period, as inflation would rise but pension funds would not be able to grant indexation because of low funding.

It said that, even though the technology and confidence scenarios showed a funding improvement of 1 percentage point and 6 percentage points, respectively, indexation still would not be granted.

“As inflation would be lower under these scenarios, the necessary inflation compensation would also be less,” explained Caroline Bosch, partner at Sprenkels & Verschuren.

She said the consultancy had incorporated the scenarios into its asset-liability management model, and the calculations could help pension funds get a better view of climate change risks in their investment portfolios.