Gerard van Olphen, the new chief executive at Dutch asset manager APG, has said the low-interest-rate environment plaguing European pension funds is “structural” and will not go away any time soon.
Speaking at a congress organised by think tank Netspar, he pointed out that low interest rates were the consequence not only of the European Central Bank’s (ECB) controversial quantitative-easing policy but also Europe’s generally ageing population and relatively low productivity.
With his comments, Van Olphen takes a different view from that of his predecessor, Dick Sluimers, who resisted the introduction of market rates for discounting pension liabilities and argued that central banks were keeping interest rates artificially low.
Van Olphen’s view is more aligned with that of Dutch financial regulator De Nederlandsche Bank (DNB); Klaas Knot, DNB president, recently argued that the low rates seen today were a function of low inflation, an ageing population and the slow growth of productivity.
European pension funds have seen liabilities sky-rocket as a consequence of the low rates, and schemes that have hedged only small parts of the interest risk on their liabilities have suffered in particular.
At the Netspar congress, Van Olphen declined to comment on the hedging policy of APG’s clients, including the €356bn civil service scheme ABP.
ABP has hedged no more than 25% of its interest risk and lost 0.5% on this cover last year.
“This discussion would be too simplistic and single-sided,” Van Olphen said, adding that “with the knowledge of hindsight, things are always easy”.
He pointed out that the drawback of an interest hedge was that pension funds, when using interest swaps, must “park” a significant amount of assets with the counterparty as a security.
“This also poses a system risk,” he said.
Van Olphen said APG, in light of the coming changes to the Dutch pensions system, must improve its ability to adapt, as the pace of change was “increasing all the time”.
“In the past, the sector had to absorb two changes over five years,” he said.
“Nowadays, we see five major developments in a single year.”