Why does Dutch pension money pay off so well?

Why does Dutch pension money pay off so well?

Published on: 27 November 2020

What catches the eye first in the OECD report “Pension Markets in Focus 2020” published earlier this month, is the investment returns obtained on pension assets in the Netherlands (in the second and third pillars, i.e. pension funds or insurers). With a return of 13.7 percent, the Netherlands was surpassed only by Ireland (18.5 percent). A superior performance? Ronald Wuijster tempers the enthusiasm: "The return from one year doesn’t mean anything to me. Our clients' obligations are long-term in nature, so APG also invests for the long term. The returns over five, ten and fifteen years are relevant to us".

 

Strong logic

In terms of average annual yield over a fifteen-year period, Colombia (6.2 percent), the Dominican Republic (6.8 percent) and Uruguay (5.2 percent) performed best. But the Netherlands and Canada were also among the global leaders with a figure of around 5 percent. This is not only due to skill.

Wuijster: "Certainly, we have a well-structured investment policy, we've given it a lot of thought via ALM (Asset and Liability Management, matching your investments to your short- and long-term payment obligations, ed.). We have a long-term orientation, well-targeted investment solutions, and we respond to sustainability. This quality as an investor certainly contributes to the strong Dutch performance over the past fifteen years. But that performance also has to do with the fact that Dutch pension funds are the only ones to have an interest rate hedge (a way of limiting exposure to the investment risk of falling or rising interest rates, ed.). This hedge is not mandatory in itself, but there is a very strong logic to applying the FTK".

 

Seriously contributed

The FTK (Financial Assessment Framework, part of the Dutch Pensions Act) stipulates the statutory financial requirements for pension funds. The guidelines of the Financial Assessment Framework (FTK) require a pension fund to assess its investments (and therefore also their risks) in relation to its obligations. For example, for a payment obligation that lies far in the future, you can take more investment risk now than for a payment you will be making next month. 

Wuijster: "As a result of the FTK, it is customary for a pension fund to hedge about 50 percent of the interest rate sensitivity. And that has been an unexpected factor that has seriously contributed to the investment returns of Dutch pension funds over the past 10-15 years".

 

In “Pension Markets In Focus 2020”, the OECD provides a global overview of the accumulated pension capital of the 37 member states and describes the most important developments. The most important financial indicators are listed, such as the total accrued pension assets, what these assets are invested in, and the returns achieved.