NETHERLANDS - The former head of one of the Netherlands largest corporate pension funds has criticised the "rigid" application of LDI strategies by pension funds in the Netherlands.
Dick Snijders, former chief executive of the Philips Pension scheme, said at the IFM conference in Geneva today that many Dutch pension funds had missed out on the recovery of the markets.
"Very many of the implemented forms of LDI strategies by pension funds in the Netherlands are negative so far because they missed the long-term opportunity for return."
Snijders said pension funds had adopted "more a kind of liquidation concept than a going concern approach: "Many of the LDI policies overweight the short-term risk. And the liquidation instead of long term concept leads to less equity in the portfolio at the same level of risk.
"Pension funds should be very careful in their use of LDI strategies. My conclusions are that a rigid LDI policy overestimates short-term risks leading to too low equity stakes - today on average funds in the Netherlands have about 40% invested in equities - and because of that they have to run on a solvency level of over 135%.
He said the higher funding required by LDI would lead to a deterioration of pension schemes, as the sponsors comply with the regulatory requirements."
"My observations based on the experience of the past two years in that in a lot of pension funds boards and sponsors are confronted with products made by asset managers that are focused very rigidly on immunising the risks of the plans and very often the arrears of what happened to the financial markets a couple of years ago."
Snijders said that pension funds with low solvency ratios were forced into strategies such as duration matching while funds with strong funding ratios did not use their full risk budget because of LDI strategies.
"Between 2004 and 2005 a lot of the pension funds that went into LDI missed out on very obvious opportunities and were not very lucky with their timing.
"It's very difficult with this kind of emphasis to ever escape from a a weaker situation," he concluded.