NETHERLANDS - The new solvency requirement norms may yet allow Dutch pension funds to increase their allocation to equities, according to new research.
A study by ABN AMRO found that reducing the duration gap between assets and liabilities is a very effective strategy for pension funds to meet risk solvency parameters, and can even allow higher equity allocations.
ABN AMRO’s fixed income strategist Harvinder Sian said that funds may find the option of increasing their weight of equities in the portfolio at the expense of bonds “particularly appealing as the cult of equity for long-term investors still existed.”
Sian explained that though indexation has been made conditional for pension funds, the bulk of the Dutch pension fund sector was aiming for indexed benefits.
The study also found that in order to meet their solvency requirements, if Dutch pension funds reduced the gap between assets and liabilities by even a year using 30 year swaps, this would translate into buying interest of e29bn.
Sian said that given the size of the Dutch pension fund sector (e475bn), even a modest reduction of one year would lead to a non-directional richening of 17bp in 30-year rates.
He expects pension funds to move towards closing the duration gap in the second quarter of 2004 and more significantly in the second half of the year.
“It is likely that pension funds will look to buy largely in 15 year-30 year paper to close the duration gap, otherwise the necessary buying amounts becoming extremely large and will influence to a great extent the bond-stock allocations,” he said.
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