NETHERLANDS - Dutch pension funds that delay in implementing solutions that close the duration gap between their assets and liabilities in the hope that interest rates will rise risk breaching the new FTK regulations, warns Benoit Fally, managing director of State Street Global Advisors in Brussels.
Fally said for a pension fund with a funding ratio of 105%, no positive change in interest rates, or even worse, a drop, could see the fund left with a funding ratio of 100% or less when FTK takes effect on January 1 next year.
FTK sets a minimum funding requirement for Dutch pension funds of 105%. Many funds are hoping interest rates will rise, decreasing liabilities and in turn increasing their funding ratio.
Fally said the Dutch market had shown strong interest in SSgA’s new Pooled Asset Liability Matching Solution (PALMS) but were yet to come on board: “All of them are interested,” he said. “Most pension funds recognise the need to close the duration gap but the problem at the moment is most expect interest rates will rise.
“Whether they are right or wrong is not important... But they are reluctant to lock in the value of their liabilities at the current rate. They may be disappointed.”
SSgA’s solution seeks to offer pension funds returns over and above conventional fixed income products. The PALMS family of pooled fixed income funds span 40 years in a series of five-year maturity funds that each deliver annual cash flow payments when needed.
Fally said one of the best ways to match assets and liabilities was through the use of derivatives like swaps. But while Dutch giants PGGM and ABP have the intellectual capital in-house to price a swap, smaller funds do not, he added.
SSgA’s new solution combines asset and liability matching with a “dynamic asset allocation” approach, Fally said.
“The liabilities of the pension funds fluctuate much more now than in the past and as a result of this fluctuation, people need to put in place much more dynamic asset allocation,” he added.
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