The degree to which Dutch industry-wide pension funds have hedged the interest rate risk of their liabilities varies widely, according to pensions supervisor De Nederlandsche Bank (DNB). 

Based on second quarter figures, the interest cover of the more than 50 sector funds ranged from 15.1% at the €1.4bn scheme for the hydraulic engineering sector (Waterbouw) to 67.7% at the €1.5bn scheme for the wood trade (Houthandel), the regulator found.

The interest rate hedge at the industry-wide schemes was 43.2% on average, it said.

Because of the ongoing drop in interest rates, pension funds’ interest rate hedge significantly affected their coverage ratio.

Schemes with higher interest rate protection – usually through bonds and interest swaps – have been less hit by an interest rate fall than pension funds with a lower hedge.  

Highest level of hedging at IBM

At 22% and 32.5%, respectively, the interest rate hedges of the €459bn civil service scheme ABP and the €238bn healthcare scheme PFZW were at the lower end of the scale.

De Nederlandsche Bank DNB

De Nederlandsche Bank

Other sector schemes with a low interest rate cover were Schilders (25%), PGB (26.5%), PNO Media (21.6%), PWRI (26.7%), and BPL (29.4%).

Some pension funds apply a dynamic interest rate hedging policy, aimed at reducing the interest cover when interest rates drop.

Sector schemes with an interest cover of more than 55% include Recreatie (59.2%), Foodservice (57.5%), Particuliere Beveiliging (60.4%), Koopvaardij (63.1%), and Detailhandel (64.3%).

With a cover of 121.4% the €4.8bn Dutch pension fund of IBM has the highest interest hedge, the DNB figures revealed.

Usually sector schemes have a lower interest cover than company pension funds. An explanation for this is that sponsors want to exclude the interest risk as, contrary to equity risk for example, they deem it as a risk without a reward.

Pension funds of financial institutions tend to have an interest hedge of more than 60%.

According to DNB, seven company pension funds in the Netherlands have an interest rate hedge of 100% or higher. 

This means their euro-denominated investments are more susceptible to interest rate changes than their liabilities, according to consultancies WTW and Mercer.

Earlier this month, the €3.6bn pension fund for KLM cabin staff increased its interest hedge from 31.2% to 47.5%, citing interest rates falling to “unprecedented levels”. The decision marked the end of its dynamic hedging policy of quarterly reductions of the hedge since the end of 2018. At the end of September, the pension fund’s funding ratio stood at 99%.