Dutch pension fund allocation to credit bonds to increase by €300bn – AXA IM

Dutch pension fund allocation to credit bonds could increase by €300bn under the new pension system, which comes into effect in 2026, according to AXA Investment Managers (AXA IM).

Speaking at an AXA IM roundtable yesterday, 14 April, AXA IM Netherlands country manager, Hanneke Veringa, said that based on what has happened in the UK, which has largely shifted to a DC system, she expects the Dutch allocation to potentially increase by €300bn.

The Dutch pension fund market is worth €1.7trn in assets, she said, with roughly €500bn allocated to government bonds currently in the DB system. However, the country’s pension system is in the process of transitioning from the DB system to a DC system, which is targeting a completion date of 2026 for all schemes. As a result, Veringa predicts that the allocation to government bonds will decrease, whilst credit bond allocations increase. She believes pension funds will ask themselves whether they really need to invest in bonds with a 20,30 or 50 year duration.

“We actually expect the allocation we see today in credit bonds will double and the allocation in government bonds will be half of what it is today going forward.”

As part of its analysis of how pension fund investments will change under the new system, she said AXA IM has been looking at the situation through a couple of lenses, the first being the UK perspective, which has also largely transferred from DB to DC.

“If you look at the current asset allocation of a typical pension fund in the UK and you compare it to the pension funds that we see today in the Netherlands, it’s straight away very obvious… the allocation to credit bonds in the Netherlands is relatively small, it’s actually one of the smallest in Europe. If you compare this allocation to the UK, the allocation is almost twice as high as it is today in the Netherlands.”

However, she said there are several considerations that will influence how this transition will take place.

“One of them is that pension funds still need to manage the money under the current regulatory system… in the current system or even for the transition system that is going to be put in place there is one thing that is going to be really important and that is the funding ratio. In order to move from DB to DC they need to be at a 95 per cent funding ratio. This will make it a little bit more difficult,” she explained.

Veringa said several large funds, such as APG, PGGM and PFZW are still not above the 95 per cent funding ratio.

“In the future if they are going to put this policy in place they need to take into account that the yard stick going forward is going to be projected return, and if they are not able to meet this projected return they have to adjust their payments to pensioners more or less straight away.

“We expect that there will be an inclination to focus on an asset allocation where there is a certain degree of certainty about the cash returns that are going to be achieved,” she said.

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