The Netherlands: Pensions funds will change risk-free rate – Rabobank

The Dutch newspaper Telegraaf reported this morning that all parties involved in the pension reform discussion agreed on changing the risk-free rate term structure for Dutch pension funds.  The pension agreement has been redefined and only one new pension contract remains. Bas van Zanden, Senior Pension Analyst at Rabobank, expects a decrease in demand for hedging by Dutch pension funds.

Key quotes

“The pension contract will split up all pension funds into an:  Accrual phase – Every participant has his own personal pension account and investments will be based on the Lifecycle principle This means the riskiness of the portfolio decreases with age.  Retirement phase – This is a fund with the assets of all retirees and upcoming retirees combined. The fund participants will share risks like the investment and longevity risks similar to the current set up of pension funds.”

“If implemented these changes will likely result in a: Decrease in the demand for hedging by Dutch pension funds and a possible increase in demand for risky assets.” 

“It is unclear whether all pension funds are required to switch to the new contract or have the option to do so.  It is also unclear whether the members of the unions will agree with these changes. These changes still have to be implemented, which will take at least 3 years.”