The Dutch pension reforms, which will see all pension schemes move from a defined benefit system to a DC-like collective system, will lead to €500bn of assets transferred from liability driven investments to cash flow driven investments.

Speaking at a webinar on the impact of the pension reforms, AXA Investment Managers country manager in the Netherlands, Hanneke Veringa, said the reform is going to have a “profound impact” on the asset allocation of pension funds in the Netherlands and, more widely, the fixed-income market in Europe.

Currently Dutch pension funds, according to central bank figures, allocate 39 per cent to risky assets, 12 per cent in assets that could qualify for a matching portfolio, and the remaining 39 per cent are allocated to the matching portfolio.

“This asset allocation is expected to change massively in the next five years because a large component is actually being allocated to government bonds and is being used to hedge the interest rate risk,” Veringa explained.

“We expect that roughly €500bn (not including the two largest finds ABP and PFZW) will be allocated from a liability-driven investment (LDI) motive to cash flow driven investments. That will imply that pension funds are expected to move out of govies, potentially out of long-dated swaps with a maturity of over 10 years and increase their allocations to credits in particulars and potentially also index linked bonds.”

Pension funds will have a five-year period to make their changes before the deadline in 2026. Veringa believes there will be “first-mover advantages” when it comes to transferring assets.

“I would assume that with a period of five years that it can be done in a smooth way because five years is a long time. But it can only be done in a smooth way if decisions are taken quickly... If decisions take a long time and then everybody starts to implement before the deadline there will be a market impact. So the only way to manage this smoothly is a quick decision making process and then a long period to get it implemented,” she stated.

Veringa believes that it would make sense to look at nominal bonds versus inflation-linked bonds.

“Maybe this is a good period to slowly start to build up a position on inflation linked bonds. Take a look at credit – can you add credit, triple AAA credit, double AA credit – start to expand your position in credit at the expense of government bonds, potentially short-dated credit if that would provide more comfort.”

She believes one of the most challenging parts of the investment strategy will be to determine the risk return profile for each of the age groups in the collective funds.

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