Dutch pension funds dumped Asian equities in 2022
Dutch pension funds sold €9 billion ($9.6 billion) worth of Asian equities last year, driven largely by the need to post additional collateral on interest rate derivatives following global interest rate rises, according to the Netherlands’ central bank DNB.
Pension funds’ sales of equities in Japan comprised €5 billion, those in Taiwan totalled €1.8 billion, Korea and India each comprised €900 million, while sales in Hong Kong and China were at €900 million each, DNB disclosed to AsianInvestor in response to a request for information.
Dutch pension funds sold €142 billion worth of equities and investment funds in 2022. The total value of Asian assets was not available at the time AsianInvestor went to press, but for comparison, 8.2% of Dutch pension funds’ property investments are held in Asia, according to DNB.
“Historically, Dutch pension funds had small allocations to Asian equities, and even smaller [allocations] to bonds,” said Anton Kramer, founder of OverRendement, a Dutch consultant.
Dutch pension funds’ global sales totalled €88 billion in the first half of 2022, a record over a six-month period. During this time, pension funds contributed €82 billion to margin accounts.
But a spokesperson from APG said that the pension fund had not shifted its interest rate hedging strategy, part of which included swaps, in the face of rising rates.
OverRendement
“The rise in interest rates and the valuation impact on bond portfolios and interest rate swap portfolios has not impacted asset allocation. We rebalance the portfolio in order to maintain balance between equity, fixed income, and other asset classes. That balance is specified in target asset class weights and a target hedge ratio of the interest rate risk,” he said.
He added that the fund had engaged in rebalancing recently.
“Broadly speaking, equity and equity-like investments have been sold. This has been taken care of in line with the investment plans of our clients,” he said.
MARGIN SPIKE
Increasing interest rates in the first half of 2022 was good news for pension funds, since they reduced funds’ liabilities to current and future pensioners, increasing so-called funding ratios.
But the rising rates also depressed the values of the interest rate derivatives that pension funds use to dampen their exposure to shifts in interest rates. The falling values of such derivatives required funds to increase collaterals that were posted with counterparties.
Dutch insurers also made considerable sales to fund margin requirements on derivative positions in 2022. They deposited €17.4 billion in margin requirements during the first three quarters of 2022, or 5.4% of their liabilities, according to DNB.
Seventy-five percent of these deposits was funded by asset sales, totalling €23 billion in the first nine months of the year, or 7% of the industry’s total assets.
Dutch pension funds were down an average of 23% in 2022, according to an analysis of DNB returns data of 177 pension funds that was published in March by OverRendement and Bell, another consultancy.
The research found that pension fund portfolios fell by a combined €368 billion last year, from €1.8 trillion to €1.4 trillion, a level last seen in 2019. Every fund saw losses, which ranged from -40.7% to -9.3%.
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LOSING ON INTEREST
Last year’s rise in interest rates led to losses on interest rate hedges that were more than three times as high as losses on equities and real estate. In 2022, the interest rate at which pension funds calculate their liabilities rose from 0.5% to 2.5%, with most of this in the first half of the year.
Sales to meet collateral requirements made little contribution to pension fund losses. For most Dutch pension funds, losses on interest rate hedges were more than compensated for by falling liabilities to pensioners.
“They had to come up with collateral for the derivatives by selling their most liquid assets, but in terms of relative returns, coverage ratios increased last year,” said Kramer.
Traditionally, dynamic interest rate hedging policies have been popular among Dutch pension funds. The policies manage the impact of falling interest rates, which increase liabilities to pensioners.
But exceptionally low interest rates in recent years have reduced their use, with several funds shifting from dynamic to fixed ratio hedging policies, according to Kramer. “Those [who] increased their hedging as interest rates fell may have missed out on gains over the last year as interest rates have increased,” he said.