NETHERLANDS - The threat of interest rate risk for Dutch pension funds has become the single most important risk driver when managing assets in a portfolio, a key industry spokesman has claimed.
He said: "The Dutch pensions regulator has made risk the most important factor on which they steer their pension fund ship.
"The biggest regulatory requirement is that the solvency ratio of the pension fund is maintained above 105% of all the nominal liabilities. If they are below that, they need to have an immediate rescue plan prepared and that is a major concern for Dutch pension funds in today's economic climate."
Van Bergen explained that currently, the interest rate component was at the top of the agenda for pension funds.
Switching focus, he also said managing liabilities was an ever-increasing responsibility, and inflation rate risk played a key part in that risk, particularly for UK pension funds which have an inflation embedded liability.
Van Bergen added duration had become a key measurement for the interest rate risk predictions in pension fund portfolios.
"The challenge for pension funds is the risk of having interest rate risk exposure due to the mismatch of assets and liabilities on the balance sheet and currently there is a lack of ability to efficiently or quickly adjust portfolio duration to reflect interest rate expectations", he said.
Van Bergen's comments echoed research from Vrije University in Amsterdam which revealed the funding status problem was more linked to interest rate risks rather than equity risks.
He warned: "When interest rates go down, pension funds will suffer from mismatched duration gaps and drastically experience funding status declines."
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