Dutch pension funds have invested more in liquid, short-term investments, analysis from De Nederlandsche Bank (DNB) has found.

The analysis found that about a tenth of the assets that pension funds have outstanding are now in short-term investments, totalling €160bn this summer.

The investments include corporate bonds and derivatives such as 'interest rate swaps'. These are instruments used by large investors to absorb shocks in the financial markets.

In addition to this, the data also pointed out that pension funds leave more money in the bank than they did a few years ago, as that money can be withdrawn immediately or very quickly, unlike assets invested in equities or other products.

Pension funds therefore hold more immediately withdrawable assets as collateral for the derivative investments.

However, DNB said this could have a negative impact on the coverage ratio, which indicates whether a fund has sufficient cash on hand to meet its obligations - the extent to which a fund can pay out pensions to current and future pensioners.

If the coverage ratio falls below 100 per cent, a pension fund has too little cash to meet its obligations. However, if the rate reaches 110 per cent or more, a pension fund may consider increasing benefits to people already receiving pensions.

DNB said the coverage ratio was currently “in good shape” and stood at 117.7 per cent, partly due to the rise in policy interest rates as when interest rates rise, the value of future liabilities falls in relative terms.

In addition to this, interest rates increased globally between 2021 and 2024, which was a move by central banks to curb inflation.

In the eurozone, the European Central Bank raised its policy rate from -0.5 per cent in the summer of 2022 to a peak of 4 per cent more than a year later. As inflation has tempered, it has since been lowered to 3.25 per cent.

Furthermore, the coverage ratio stood at 123.2 per cent at the peak of European interest rates. Due to a pension increase, it is now 5 percentage points lower.

It explained that last year some pension funds decided to increase benefits to those already receiving pensions, partly due to the high coverage ratio. As a result, liabilities increased.

However, higher interest rates do not always benefit pension funds. When rates rise, the value of certain investments that pension funds cannot cash in until later, like government bonds, tend to decrease.

These bonds often have terms of five, 10, or 30 years because a rising interest rate makes investing in new loans more attractive, and the return on credit that is already outstanding falls.

However, DNB said this autumn it will become clear whether the coverage ratio will remain high enough to allow for new indexation next year and for pensions to increase in line with inflation.

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