The six largest Dutch pension funds saw their assets under management plummet by more than €227bn in 2022, despite a slight recovery in the fourth quarter of the year. Record losses on interest rate hedges added to negative returns on equities and corporate bonds.

All six funds posted deeply negative returns, ranging from -17.6% (ABP) to -28.7% (Vervoer). ABP managed to somewhat mitigate its losses thanks to its relatively low interest rate hedge and a 45% return on its commodities portfolio.

Pension fundReturn incl interest rate hedgeReturn excl interest rate hedge 
ABP -17.6%  -12.5% 
PFZW  -22.2%  -8% 
PMT   -27.5% -10.5% 
PME  -23.3%  -10.1% 
BpfBouw  -21.4%  -11.6% 
Vervoer  -28.7%  -10.1% 

                                    Source: Pensioen Pro

If returns are corrected for interest rate hedges, negative returns are less than half of the reported figures, ranging between -8% (PFZW) and -11.6% (Bpf Bouw).

The reason for the record losses on pension funds’ interest rate hedges is the exceptional increase in interest rates: the average actuarial interest rate of a Dutch pension fund rose from 0.6% at the start of 2022 to 2.5% by year-end.

Most Dutch pension funds have hedged all or part of their interest rate risk to protect themselves from the risk of rising liabilities, and lower funding ratios, in case interest rates head lower.

Pension paradox

The losses on their interest rate hedges have been devastating for some pension funds: ABP and PFZW both lost almost €30bn as their government bonds, which they use to hedge their interest rate risk, lost more than 30% of their value.

Because most pension funds do not hedge their interest rate risk entirely, however, pension funds’ decrease in liabilities exceeded their investment losses resulting in higher funding ratios. As a result, ABP president Harmen Van Wijnen called 2022 “the year of the pension paradox”.

According to Marcel Andringa, executive board member at metals and technology industry fund PME, Dutch pension funds lost some €300bn to the rising interest rates.

He said: “This is an unprecedented amount, but it can be shouldered by the pensions sector thanks to the returns that have been made since 2009.”

The investment results in the fourth quarter of the year suggest there is light at the end of the tunnel. PME even booked a slightly positive return of 0.7%, though the other large funds including ABP and PFZW continued to lose money albeit at a lower pace.

Real estate valuations adjusted downwards

The negative returns in the fourth quarter were mostly due to losses on private real estate, as valuations of assets were adjusted downwards due to the higher interest rates.

PFZW posted a return of -3.4%, while PME and PMT lost 2.5% and 3.5%, respectively. Because previous quarters had shown positive returns, overall returns for 2022 were still positive ranging between 2.7% and 6.3%.

PMT said its Dutch direct real estate holdings did particularly badly: residential real estate lost 7.4%, offices were down 6.3% and retail posted a -2.5% return. BpfBouw posted its worst return on offices while PFZW also took big hits on its European logistics holdings.

Private equity suffered from the same dynamics as real estate. The Netherlands biggest private equity investor ABP posted a return of -7.3% for the fourth quarter, bringing the overall return for 2022 down to negative territory.

This contrasts sharply with 2021, which saw a record return of 39.4% for ABP. PFZW still posted a modest positive private equity return of 1.8% for 2022.

For the original article, go to Pensioen Pro