NETHERLANDS - Lack of clarity on the value of illiquid investments may result in very disappointing returns of hedge funds and structured financial products, according to Bob Puijn, chief investment officer for pensions asset management at Interpolis.

After the attractive returns seen over the last couple of years, pension funds may see twice the return but it is likely to be in the red rather than delivering a positive gain, he suggested during the spring congress of the Circle of Pension Specialists (KPS).

As a result, pension funds enjoying a 10% gain until now could, for example, see a negative return of -20%.

"Enhanced cash products might also be affected by the present problems in the market," Puijn added, as he expects pension funds to increasingly focus on risk aversion and de-leveraging.

According to Puijn, Dutch pension funds' cover ratios have decreased 10% on average to an average of 134% during the first quarter, and the funding ratio problem will continue for quite a while.

"It will cause additional pressure on the value of equities, if all pension funds try to adjust their strategic asset allocation by decreasing their equity portfolio," he pointed out.

Puijn said he has noticed the hedging of strategic interest risks has raised many questions at pension funds recently, adding currency hedging might become far less effective in the near future.

"The new financial assessment framework (nFTK) is the new stranglehold on pension funds, forcing them to operate like short-term investors and to take less risks," said fiduciary expert Anton van Nunen, supported Puijn's view.

"With a duration gap of 15 years between investments and liabilities, every percentage decrease of the market interest rates will cause a 15% drop in a pension fund's cover ratio," he explained.

Schemes should appoint a fiduciary manager as the link between an asset liability management study and their investments through manager selection, monitoring and reporting, Van Nunen argued.

So far, €120bn of Dutch pension assets have been brought under fiduciary management, with the first contracts being signed in the UK, Germany and Switzerland, according to Van Nunen.

"The fiduciary management fee of 5 basis points is more than compensated by the benefits of scale of the larger buying power of the fiduciary manager," he stressed.

A recent survey of KPMG has shown that over 50% of Dutch schemes are considering fiduciary management, with larger schemes in particular being interested.

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