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DNB study: Dutch funds to use more derivatives

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NETHERLANDS - A paper from Dutch pension regulator De Nederlandsche Bank sees derivatives and asset liability management becoming more important for pension funds.

The working paper - ‘Financial behaviour of Dutch pension funds: a disaggregated approach' - by Jan Kakes of the DNB's Financial Stability Division, examined the financial behaviour of 77 Dutch pension funds during 2002-2005 representing some three-quarters of the country's pension assets.

"This is a short sample, but largely covers an interesting episode during which pension funds had to deal with dramatic financial market developments." It is stressed that the article does not necessarily represent the DNB's official position.

The data does not include off-balance sheet positions, the study notes. "Pension funds have an incentive to use derivatives to reduce interest rate risk, exchange rate risk and their exposure to the stock market.

"Presumably such instruments will become more important with the introduction of a new, more risk-based regulatory framework in 2007."

The DNB performed analysis which "show that pension funds do not reduce the risk of their portfolio after a deterioration in their financial position".

"As the proportion of active members falls, it will become more difficult to prevent underfunding by raising contributions," it states.

"Other trends in the economy are increasing job mobility, mergers and acquisitions, and sectoral shifts.

"As a consequence, pension funds increasingly will have to accommodate transfers of pension rights and deal with discontinuity issues.

"Differences across pension funds - as established in this paper - may be a further complication to the portability of pensions.

"Given these challenges and the limited tools to adjust a fund's financial position, a growing focus on asset liability management will probably be important to protect the pension sector's resilience."

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