Dutch pension funds are preparing to sell “significant” volumes of long-term government bonds in the coming years as the country transitions to a new pension system.

The shift, part of the Dutch Future Pensions Act (Wtp), will see funds take on more investment risk in pursuit of higher returns, reducing their reliance on long-dated bonds as a hedge against interest rate risk.

Under the current system, pension funds typically hold long-term government bonds to match their liabilities and protect against interest rate fluctuations.

In the new framework, however, there will be “less demand for longer-dated interest rate sensitivity, so longer-dated swaps and long-dated euro government bonds,” Aon Netherlands director wealth, Frank Driessen, said.

While the exact volume of bonds to be sold remains unclear – although some experts predict around €125bn – Driessen said it largely depends on the timing of individual funds’ transitions and their portfolio structure.

Driessen described the shift as a “significant change” for the Dutch market.

He warned, however, that increased sales of government bonds could put pressure on bond prices.

“Pension funds might run the risk that they lose money on the long-term interest hedge instruments,” Driessen said.

“If this were to happen, it would negatively affect funding ratios or the value of the accrued assets of participants.”

However, the gradual pace of the transition should allow funds time to adjust their investment strategies, he noted.

Following the reform, pension funds are expected to reduce the duration of their fixed-income holdings and increase allocations to higher-return assets.

“Under the new pension system, interest hedging is only interesting in the payment phase, leading to less interest hedging appetite in comparison with the current system,” Driessen noted.

The changes mark one of the most substantial shifts in Dutch pension investment strategy in decades, with potential ripple effects across European government bond markets.

---