Panel discussion: ‘Risk in the investment portfolio under the Wtp: how do you structure it?’

May 1, 2025

_{This discussion was originally written in Dutch. This is an English translation.}

New system offers scope for optimisation

By Hans Amesz

During the pension seminar ‘Investing under the WTP during and after the transition’, chaired by Jacob Schoenmaker, the panel discussion ‘Risk in the investment portfolio under the WTP, how do you build that up?’ took place with Jeroen van Bezooijen from PIMCO, Marleen Koetsier from APG, and Paul de Geus and Henk Radder, who are both involved in several pension funds.

Will you take more investment risk under the WTP?

Paul de Geus: ‘At one of the two pension funds where I am a director, we are going to take more risk. It is a young fund and, unlike the FTK, the WTP gives us the opportunity to take more risk. The other fund is a bit more mature and already has a good coverage ratio and a relatively high risk profile, so nothing will change in terms of risk.’

Henk Radder: ‘At the pension funds I am involved with – both funds with a solidarity scheme and a flexible scheme – analyses show that the solidarity reserve in the SPR and the risk-sharing reserve in the FPR in particular can contribute to allowing slightly more risk to be taken without compromising the stability of pension payments. That is perhaps the most important benefit of the new system.

Marleen Koetsier: ‘The APG staff pension fund made the transition in January. Ultimately, it went quite smoothly. We raised the risk profile slightly, which was a direct result of the risk preference survey among participants. The expiry of the required own capital, the VEV, has also created more room for manoeuvre.

Jeroen van Bezooijen: ‘Now that the straitjacket of the FTK is disappearing, you see that more will be invested in business values. I have not yet seen any clients who are going to take less risk.

We have observed that most pension funds are taking more risk in line with the DNB's findings. Will this change the composition of the commercial assets in the portfolio?

Radder: ‘It is quite possible that the objectives of the return portfolio will be slightly adjusted. If you start to focus more on purchasing power than on nominal security, this could lead to a slightly different composition of the portfolio. I think it is good to take another look at your investment beliefs, your objectives for your return portfolio, and then see whether your portfolio is still appropriate. You don't have to change for the sake of change. But if there is a good reason to do so, I can imagine that you will make changes, which I don't expect to be very dramatic.'

Koetsier: ‘There are more opportunities to take a more economical approach to optimising the return portfolio. For example, we have increased our exposure to alternative credit and EMD. For us, it has mainly been a shift from a bit of equity risk to a bit of high interest rate risk, which is filled by illiquid alternative credit.’

Van Bezooijen: ‘We have seen a clear increase in interest in high yield recently. This is mainly driven by risk/return considerations. High yield has a better Sharpe Ratio for comparable risk than, for example, a combination of equities and government bonds. Room for high yield is being freed up partly from the existing fixed-income portfolio and partly from the equity portfolio.’

How will the degree of diversification change per age cohort?

Radder: ‘In this respect, there is a big difference between the solidarity-based and flexible schemes. Under the solidarity-based scheme, the excess return is the same for everyone and is then allocated in different percentages per cohort. The beauty of the flexible scheme is that you can optimise the lifecycle for each age cohort. Young people still have such a long horizon that you can actually focus primarily on high returns, while adding extra diversification as you move further into the lifecycle. As retirement age approaches, returns are still important, but so is the stability of those returns. You can start with equities and gradually add extra diversification. Research has also shown that young people are very enthusiastic about impact investing. So we have ensured that the lifecycle also includes an explicit impact allocation for young people. In theory, it is possible to offer an additional dark green or grey lifecycle within the flexible scheme.

Will the borrowing restriction for young people be lifted?

De Geus: ‘None of the three funds I am involved with are lifting the borrowing restriction. This is directly related to the outcome of the risk preference survey, which determines risk appetite based on the implicit lifecycle. In this case, it is not appropriate and the risk is simply too high.’

Koetsier: ‘The direct consequence of the risk preference survey is that it was not appropriate for younger cohorts to lift the borrowing restriction.’

Radder: ‘Within the FPR, the borrowing restriction cannot be lifted in any case. The SPR fund I am involved in has made calculations with regard to the borrowing restriction. Because young people still have relatively little capital, it does not really matter in terms of results whether the loan restriction is lifted or not. Another factor we weighed heavily is that the explainability of various issues under the new system will become very important. Clear communication is essential. When you see the heated discussions that have erupted in the House of Representatives about lifting the loan restriction, you know you're going to get the same thing with your participants. That led us to think: if we can solve it in a different way and still achieve our objectives, that's fine too.

Aren't you just making it easier for yourselves?

Radder: ‘Partly, yes. But there are many roads that lead to Rome, and abandoning the lending restriction is certainly not the holy grail. If you abandon the lending restriction, you actually become more dependent on it and therefore on the correlations that underlie it. History has proven that diversification works well, except when you really need it. So there are pros and cons. I am not openly opposed to lifting the borrowing restriction, but I also understand the reasons why funds choose not to do so. I think communication is really important in this regard.'

Question from the audience: “What do you think will happen with regard to currency risk hedging, and does this vary per cohort or throughout the lifecycle?”

Koetsier: ‘We distinguish between the matching portfolio and the return portfolio. In the matching portfolio, the currency risk remains fully hedged. In the return portfolio, it has already been reduced slightly in some areas. Because EMD and alternative credits have been part of the return portfolio since the transition, the total net currency risk is slightly higher on balance. But the differences are not very large.’

De Geus: ‘I think that reducing the currency risk is in line with the optimisation of the return portfolio, which involves taking another look at the weightings. Lowering the 100% currency hedge also generally leads to an improvement.’

Can lessons be learned from the past with regard to the pension transition?

Van Bezooijen: ‘We looked to see whether there were any developments in the pension field anywhere in the world that were comparable to the Dutch pension transition. Ultimately, we came to the conclusion that it is a truly unique situation to convert an entire DB system to a DC system. It is true that Denmark had a system with guaranteed returns about twenty years ago, similar to the old annuities in the Netherlands. After the financial crisis, the guaranteed returns were abolished and a collective DC system was introduced. In terms of investments, the allocation to government bonds in fixed-income portfolios has been significantly reduced, for example. But a lot has changed on the illiquid side in particular. The large Danish pension funds all have between 15% and 50% of their assets in illiquid investments, i.e. in infrastructure, real estate, private equity and private debt. Assuming that the considerations in Denmark were well thought out, you would expect to see similar developments in the Netherlands.

How will inflation risk be dealt with in the new system with a view to maintaining purchasing power?

Koetsier: ‘Maintaining purchasing power is certainly the ambition. This plays an essential role in the assessment of the intended pension results. Currently, a pension fund decides on indexation every year. This means that people know whether or not they will be compensated for actual inflation. Under the new system, they will simply receive a different pension. This needs to be communicated very clearly. If more risk is taken, pensions will move more in line with the economy and may become more volatile. It is therefore not possible to guarantee purchasing power.

Radder: ‘If you don't take enough risk in the payout phase, you won't keep pace with purchasing power or long-term inflation. That's very important, which is why it's good that the new system has the necessary buffers to ensure the stability of pension payments and enable you to continue investing sufficiently in business assets during the payout phase.’

De Geus: ‘We have looked at this very carefully in all our calculations: how can this best be achieved? It is not just a matter of taking sufficient investment risk in the payout phase, because that is where it has to come from. But also by not setting the interest rate hedge in the payout phase at 100, but at 90 or even 80, for example. That also helps.’

There has been talk of adjusting the asset allocation. All kinds of illiquid investment categories were mentioned. Did you consider whether those investment categories and their returns are understandable to the participants?

Radder: ‘Under the new system, it will indeed become more important for people to have a better understanding of what they are investing in than is currently the case. This applies, among other things, to the costs, the complexity of the investment categories, the explainability and the ESG aspects of alternative investments. These are all elements that you have to weigh up when deciding whether to invest more or less in illiquid investments. There is no single answer; it is a matter of weighing up various aspects that will be different for each fund.'

Can pension fund participants who have already switched to the new system already view their own pension pot and are they doing so more often?

Koetsier: ‘As participants in our staff pension fund, which switched in January, we can see the total value of our pension pot and how it has changed every month on the fund's website. In February, we gained insight into the effects of the transition for the first time. The difference with the expectations prior to the transition turned out to be minor, so we did not receive many questions about this. We do expect more questions in the future, for example about the returns of the various cohorts. Communication plays an important role in the transition.'

Radder: ‘We already have a DC scheme with a collective variable pension, so people already have a pot for at least part of their pension scheme where they can see how it is invested. We sometimes get questions about this, but not very many. People do look at the pot, but not very often either. We report on the size of the pot and how it fluctuates, but also on the effect this has on pension benefits.

What tips do pension funds that have already made the transition have for those that still have to do so?

Koetsier: ‘There are apparently many funds that want to take more risk. However, once a fund is in the new system, everything is fixed, so to speak, and the allocation rules cannot be easily changed. I would focus particularly on communication. How do you want to communicate with your participants about the results they can expect? I therefore think that communication will become much more important in the new system than in the current one.