NETHERLANDS - Borrowing to fund a future liability sounds like the wrong medicine for the wrong illness, but this is just what a number of Dutch pension funds are being forced to consider.
Demands for high levels of buffer capital are pushing pension funds to look beyond their sponsors for support.
ING Investment Management is in “concrete discussions” with at least five Dutch pension funds over subordinated loans, which seek to lower solvency risks in the short term.
“Rather than going to sponsors who don’t have the money available, we provide a vehicle that can help the pension fund to establish additional buffers, so they can increase the equity part of their portfolio, or at least leave it unchanged,” said Gerard Bergsma (pictured), member of the management committee, ING Investment Management Europe.
ING did, however, admit that there is an obstacle to the subordinated loans really taking off: “In all cases, it does make sense for pension funds to have additional buffers, but it is difficult for them to accept that they have to borrow subordinated money to increase the buffers,” said Bergsma.
The subordinated loan has a maturity of 10 years, with an option to lengthen if the coverage ratio is not yet sufficient to pay off the loan. Early repayment is possible after five years.
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