Paneldiscussion ‘Investing during the transition’

May 2, 2025

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

Points to consider during the transition: interest rate hedging and market liquidity

By Hans Amesz

At the end of the Financial Investigator seminar on ‘Investing under the Wtp during and after the transition’, a panel discussion on ‘Investing during the transition’ took place, chaired by Jacob Schoenmaker of Pensioenfonds PostNL. Professional pension fund manager Rik Albrecht, Sander Gerritsen of Montae & Partners, Marit Kosmeijer of Sprenkels and Hendrik Tuch of a. s.r. vermogensbeheer took part in the debate.

Will pension funds hedge in the run-up to the transition?

Rik Albrecht: ‘That depends. Of the pension funds where I am a director or chairman of the investment committee, one has already increased its interest rate hedge, another fund wants to do so, and one has considered it but ultimately decided not to.’

Marit Kosmeijer: ‘At the pension funds I am involved with, it is certainly being seriously considered. Some have already implemented it, including put options, and others may do more than just increase their interest rate hedging.’

Hendrik Tuch: ‘I think it is wise to stabilise the funding ratio more.’

Sander Gerritsen: ‘If you start looking for more protection now, that will also have an impact on the conversion on the transition date and beyond. You need to look at that carefully first. It also depends on the coverage ratio. Most attention will be focused on funds with a coverage ratio of between 120% and 125%. Funds with higher coverage ratios can suffer a little more, and funds with lower coverage ratios do not have as much leeway.

Kosmeijer: ‘The transition date is a once-in-a-lifetime moment, also for confidence in the pension fund. If you do not cover enough, the reserve pots may not be adequately filled at the transition date, for example. That is not something you can make up for in the long term.

Gerritsen: ‘These discussions were already taking place a few years ago. At that time, it was mainly a matter of analysing and considering, and no implementation took place. Now you can actually see share option strategies being implemented. I have even seen at-the-money options being taken out.

Tuch: ‘If you see that you end up with a higher percentage of shares after transfer, it would be strange to hedge a portion of that now. That would really be a one-off measure to help the directors sleep at night, and not much else.’

Albrecht: ‘I wouldn't start using put options on shares; that's unnecessary. If you sell a financial product with a built-in option at the front door, you have to buy it at the back door as well. Otherwise, you run a huge risk. As a pension fund, we don't give any guarantees, so you don't have to buy options. If a pension fund wants to reduce its equity risk, it's better to sell the shares. With options, you're really just paying for all kinds of friction costs.'

Are you taking market liquidity into account during the transition?

Albrecht: ‘There is a lot of talk about market liquidity, especially that of swaps for interest rate derivatives. The interest rate hedge is now going up for many pension funds. After the WTP transition, it will go down again. Liquidity is of course a point of attention, but I think it is being made bigger than it needs to be. After all, we are not all transitioning on the same date; we are spreading it out over time. You can make a good plan to phase out the interest rate hedge in a controlled manner. In my opinion, larger pension funds will have to pay more attention to this than smaller pension funds, which can navigate their way through it a bit more easily.'

Kosmeijer: ‘If everyone wants to go through the same gate at the same time, you have a big problem. I expect and hope that in the run-up to the transition dates of 1 January 2026 and 1 January 2027, more preparations will be made and more market liquidity will emerge.’

The transition date is a once-in-a-lifetime moment, also for confidence in the pension fund.

Tuch: ‘When I was a portfolio manager at an insurer, I was not allowed to trade between St. Nicholas Day and Epiphany without a signature from my boss because market liquidity had dried up. I don't think it's as bad as it was then, but there is a potential problem. I am glad that DNB said earlier today during this seminar: keep an eye on this and make a plan. It is wise to take a good look at your liquidity before the transition date and determine whether you have sufficient buffer for an interest rate shock. It may not be as big as what we saw in the United Kingdom in 2022, but make sure you are at least partially prepared.

How are you going to phase out 100% interest rate hedging? And will that be allowed after the transition?

Gerritsen: ‘There is a lot of discussion about this and I hope that some leeway will be allowed, particularly on the policy side. In other words, that you will be able to control the mismatch between the actual investment portfolio and the intended investment policy in some way. That gives pension funds room to manoeuvre. Otherwise, we don't really know what's going to happen. It's an open question. We don't know much about the impact on the market, but on the policy side, we should be able to do something to mitigate the problem.'

As a director, how do you deal with open questions?

Albrecht: ‘At one of my pension funds, we are in the process of increasing the interest rate match. The question then is what maturity to choose. It has been decided not to go for 40- and 50-year swaps, because we no longer need them under the Wtp. We prefer to focus on swaps of 30 years or less. We expect these to be slightly more liquid. This does mean that we are exposed to more curve risk.'

Kosmeijer: ’How you deal with 100% interest rate hedging at the moment of entry depends on the situation. If you still have all your long maturities and interest rates are likely to rise due to the liquidity situation, you may have a mismatch problem. You can also achieve 100% interest rate hedging and then focus on the short term. You can use scenarios to determine what is best for your fund by performing a cost-benefit analysis. Only in hindsight can you really determine what was the best course of action.

Gerritsen: ‘These are major risks and you need to start identifying them early on. I notice that many pension funds are mainly concerned with the period up to the transition date, but have not yet carried out any analyses for the period after that. However, this needs to be thought through carefully at an early stage. It is something that funds need to get to grips with.

Liquidity is obviously a point of attention, but I think it is being blown out of proportion.

Again, will liquidity be a problem?

Kosmeijer: ‘I hope not. The diversity of ways in which different funds deal with it may reduce the problem. In any case, I think it will be a major problem if everyone starts sorting through their portfolios in the first week of 1 January 2027 with the increased interest rate hedge. However, given the discussions we are currently having within the sector and the fact that DNB has indicated that this needs to be looked at seriously, the problem may be less significant than we fear.’

Tuch: ‘I'm not really hopeful. You almost have to start thinking about really unorthodox measures. For example, DNB has an interest in a stable interest rate market. The ECB also says that the monetary transmission mechanism must not be disrupted by anything. You could argue that this de-hedging is causing such a shock that it is indeed triggering something in the European bond market where scary things are suddenly happening, as we saw in the United Kingdom in 2022. An unorthodox measure could be for pension funds to agree with DNB that they can hand in their excessive swaps to DNB, which would then do nothing with them. That may sound strange, but from the perspective of the monetary transmission mechanism, it could well be a good idea. Because suppose we do indeed experience an interest rate shock, then we will also see interest rate shocks in the mortgage market, which nobody wants. And it could also cause a shock in the periphery. When Germany announced that it might make additional investments at some point in the future, this had a clear effect on the interest rate markets.

Albrecht: ‘If everyone has to go through the same door at the same time, you obviously have a problem. But we won't have that problem at all, because we can see it coming years in advance. As participants, we can prepare for it by making a plan. But our counterparties can see it too. The whole market can see it coming and can prepare for it. So it's not a shock. It's only a shock when something comes suddenly, unexpectedly.'

Gerritsen: ’The volumes are large and the possibilities for spreading the burden are not enormous for pension funds that are transitioning on 1 January 2026 and 1 January 2027. The room for manoeuvre is limited, so you have to be well prepared in any case. You could say: you should switch as soon as possible and get ahead of the other pension funds. But it is also a risk if everyone realises that they need to be ahead of the others. It is difficult to predict what will happen then, so, as I said, I would prefer to have a thorough assessment of the risks and be as well prepared as possible.

It is wise to take a good look at your liquidity before the transition date and determine whether you have sufficient buffer for an interest rate shock.

If everyone is talking about how interest rates are very disrupted because something strange is happening in the market, are we thinking about what strategies we can apply?

Kosmeijer: ‘If you just go for the standard method, you have to deal with your provision plus the reserve that you can distribute. If you do indeed expect interest rates to be disrupted on 31 December, you will use the same disrupted interest rate to repurchase your pension benefits. I think, with some caution, that the effect for participants will be less significant than for us as actuaries and investment professionals.

I notice that many pension funds are mainly concerned with the period up to the transition date, but have not yet made any analyses for the period after that.

There has been talk of swaps that you would be exposed to at the time of transfer and that could cause you pain. Is there perhaps an alternative solution whereby you no longer purchase swaps, but hedge with swaptions?

Kosmeijer: ‘Swaptions are very complex. Put options are often quite exciting, but swaptions are even more exciting. So, for reasons of complexity alone, I do not see this as the preferred option.’

Tuch: ‘Explaining these kinds of instruments takes time. As a strategy, you could say: do it as close as possible to the moment of entry in order to keep the price of the swaptions as low as possible. You exchange a piece of linear interest rate hedge for swaptions, which is actually a better picture. The intention is that the protection disappears at the moment of entry.’