Filter insights on this page
Capabilities
Media type
Themes
Regions
Key Takeaways
- The Dutch pension system is on the cusp of a major reform with significant implications for the interest rate hedging policy.
- The reform will lead to a shorter duration hedge for Dutch pension funds.
- The transition to the new system – and thus the change in the interest rate hedge – is expected to be concentrated around January 2026 and January 2027.
- The size, the one-way nature and the short time horizon of the change are expected to have a significant impact on liquidity in the market segment beyond the 30-year point. The impact on liquidity in the segment before the 30-year point will be less pronounced.
- Exact estimates of the impact of the Dutch pension reforms with respect to the level of rates and the shape of the curve are hard to pinpoint. However, there is consensus about the direction of the changes. The 10y to 20-year segment will be the focal point of receiving due to the shorter duration of the hedge in the new pension system. Furthermore, banks see a possible bear steepening of the curve in the 10s30s segment of the curve.
Big changes on the horizon
Chart 1: Investment policy in the old pension system and new pension system
Source: Columbia Threadneedle Investments, illustrative purposes
The investment policy of a Dutch pension fund changes from a uniform policy for the entire population of participants of the pension fund (age-cohort agnostic) to a multiform investment policy that meets the age-specific needs of the participants. In concrete terms, this means there will be more emphasis on capital growth for younger participants and, as a result, less interest rate hedging associated with these members, whilst for older participants there will be more emphasis on capital preservation and therefore more interest rate hedging. Compared to the interest rate hedge in the current pension system, this translates into a net reduction in interest rate sensitivity from current levels and a shorter duration hedge with less need for longer-dated receiver swaps. Chart 2 illustrates the difference in a typical interest rate sensitivity profile between the current pension system and new pension system.
Chart 2: Interest rate sensitivity profile in the old pension system and new pension system
Source: Columbia Threadneedle Investments, illustrative purposes
Market implications
We asked derivatives trading desks of banks for their opinions on the likely market implications of the Dutch pension reforms. The aim was to aggregate their views to produce a market consensus prediction which may differ to our own opinions and to consider the other participants in the euro swap market.
Market Liquidity impact
Banks see a potential period of significant volatility in the swap market around the most common transition dates of Dutch pension reform, the 1st of January 2026 and 1st of January 2027, as a result of the magnitude of and one way nature of the reduction in interest rate sensitivity in a relatively short period of time, exacerbated by the traditional high volume of government bond issuance at the start of the year.
Furthermore, banks indicate there are several mitigating circumstances and factors that could benefit liquidity beyond (and including) the 30-year point during the transition. Although most Dutch pension funds have planned their transition for the 1st of January 2026 and the 1st of January 2027, it is expected due to the complex changes the transition will entail, there will be a further dispersion of dates towards the middle of the transition years 2026 and 2027 and to the 1st of January 2028. A more dispersed transition of funds over transition dates is expected to have an overall positive impact on liquidity around the transition dates. The transition is being closely monitored by other market participants who could potentially provide liquidity during the transition, including insurers who require more hedging in longer tenors due to changes in their discount curve, hedge funds and other pension clients who require longer dated hedging.
Swap curve impact
Banks indicate it is difficult to give a precise estimate of the impact of the Dutch pension reforms will have on the swap curve in terms of the level of the swap interest rates and changes in the shape of the curve. The reason for this initial reservation is that many market factors underlie any change in the swap curve, not just the transition of Dutch pension funds to the new pension system. In addition, it is difficult to accurately estimate the exact route from the current hedging policy to the new hedging policy of the many Dutch pension funds.
Despite the above reservations, there is a consensus in terms of the expected direction of changes of segments of the swap market. Historically, Dutch pension funds have had a large share of the receiving side of the market segment beyond the 30-year point. The unwinding of receiver swaps in this segment is expected to put upward pressure on swap yields beyond the 30-year point, which could lead to a move towards “normalization” of the currently inverse swap curve. In addition, banks also indicate demand for Euro government bonds in ultra-long maturities will decrease from Dutch pension funds. This may have an impact on the swap spread of government bonds, which is already under pressure from increasing government debt and an abundance of supply.
The shortening of the duration of the hedge in the new pension system means that there will be more emphasis on adding interest rate sensitivity in the 10-year to 20-year segment, which according to some banks may result in an outperformance on the curve for these tenors. On the other hand, some banks indicate the flows for these focal points of receiving are too small to move the market. In general, banks do expect a bear steepening of the curve led by the 30y segment of the curve. The magnitude of the steepening is hard to pinpoint but the estimates lie in a range of 10 to 30 basis points. This might mean we are looking at positive 10s30s in the future.
Chart 3: Swap curve and possible market impact
Source: Columbia Threadneedle Investments, Bloomberg, as of 31/01/2025, illustrative purpose
