Funding ratios of Dutch pension funds may fall below 100% as a result of protectionist measures by the US and responses from other countries to this move, according to an analysis from asset manager Cardano.
Every year, Cardano publishes four macroeconomic scenarios for its customers for the next three years. These focus on GDP growth, interest rates, inflation, stock and credit markets and real estate.
The scenarios are now more relevant than ever, because many pension funds want to protect their funding ratio in the run-up to their transition to a defined contribution (DC) arrangement.
Most pension funds are set to make this transition in 2026 and 2027.
Two of the four scenarios are problematic for pension funds (see box), because they involve a sharp decrease in the funding ratio.
In the ‘depression’ scenario, the result is the worst and the funding ratio drops to 73%, as a result of a drop in both short-term and long-term interest rates to 0.5% and a stock market crash with shares falling by up to 60%.
The result in the ‘protectionism’ scenario is better but still worrying, with a drop in funding ratios from 120% to 97%.
“Most of our pension fund clients want to at least have a funding ratio between 110% and 115% when they make the transition to DC,” said Marcel Kruse of Cardano.
| Prosperity | Inflation | Depression | Protectionism | |
|---|---|---|---|---|
| The effects of the four scenarios. Source: Cardano | ||||
| Macro indicators | ||||
| GDP growth | 4% | 3.2% | -3% | 2% |
| Eurozone inflation | 3% | 10% | -5% | 5% |
| Financial markets | ||||
| 30-year interest rates | 3.3% | 4% | 0.5% | 2% |
| MSCI AC World | +60% | -10% | -60% | -30% |
Trump
The protectionism scenario involves an increase in geopolitical tensions between China and the US, and an accumulation of protectionist measures such as export restrictions and import duties.
“It seems that the protectionist scenario is now indeed happening,” said Kruse.
It seems even more intense than the scenario described by Cardano: after all, US President Donald Trump is now not only targeting China, but is also in the process of unleashing a trade war with (former) allies such as Canada and Europe. Last Wednesday, he announced tariffs of 25% on all imports from the European Union.
These protectionist measures, in the Cardano scenario, lead to a rise in inflation in Europe to 5%, a drop in the growth of the global economy to just 2% per year and a fall in the stock markets of 30%.
This entails significant risks for pension funds, which have generally not reduced their equity risk towards the transition.
“Funds that invest a lot in shares are vulnerable,” Kruse said. At the moment, the stock markets are hardly pricing in a protectionist scenario, he added.
“The markets are currently pricing in our prosperity scenario, in which equities continue to rise sharply,” he continued.
In the protectionist scenario, European equities will be hit harder than American equities because European companies are more dependent on goods exports.
“The -30% in our scenario applies to the MSCI All Country World Index. In that case, European equities will do slightly worse than American ones,” Kruse said. The impact on inflation will be stronger in the US, though.
Put options
If stock markets do start to take Trump’s threats seriously at some point, the consequences for pension funds’ equity portfolios could be considerable.
Many funds are therefore looking at put options for protection, Kruse noted. These are non-linear instruments that allow users to continue to benefit from any gains on their equity portfolios, while enjoying protection against sharp price declines.
“Many funds have discussed buying put options, but in the end they often didn’t do it because they thought it too expensive. But they now see that they still are exposed to risk,” he added.
In particular, funds that want to move to DC on 1 January 2026 now want to change tack, according to Kruse, who added that it does not cost that much to buy this protection.
“To protect a funding ratio of 115%, it costs less than one funding ratio point, on average.”
However, reducing equity risk is not something you can do just like that. The investment policy of pension funds must remain within the bandwidths of their strategic investment policy, according to the Dutch pension regulator. In practice, this means that most funds can only reduce their equity risk to a limited extent.
If they want a more meaningful reduction, they have to adjust their so-called risk attitude that determines a minimum and a maximum of risk pension funds are allowed to take.
“Adjusting this risk attitude takes quite a bit of time and effort, but a number of funds are really seriously looking at using put options nevertheless,” Kruse said. “Other funds that I advise also want to reduce risk, but do not want to have to adjust their risk attitude.”
This article was first published on Pensioen Pro, IPE’s Dutch sister publication.
No comments yet