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Dutch pension funds are set to put pressure on European government bond markets later this year as they start to sell around €125bn of long-dated bonds because of a substantial reform of the retirement sector.
Between 2025 and 2028 the €1.5tn Dutch pension industry is transitioning from a system in which final payouts to pensioners are guaranteed to a defined contribution framework, in which employers are only tied to the amount they put in. That will mean holding much less long-term sovereign debt to back their long-term promises and freeing up more funds to invest in higher-returning assets such as equities and credit.
While a handful have already switched, Dutch funds managing close to half of the total assets that need to be transferred are set to convert in January next year, with managers expected to prepare portfolios in the run-up. Strategists at Dutch bank Rabobank expect €127bn of long-term sovereign debt will be sold over the course of the transition.
The sale is the latest example of declining demand for long-term debt among pension funds which, coupled with record levels of sovereign borrowing, has helped push up bond yields around the world.
“Everyone is worried about the European long end” of the bond market, said Pooja Kumra, a rates strategist at TD Securities, adding that sales may come “very quickly at the end of the year . . . but pre-emptive trades could be punitive if there are more delays”.
PFZW, the second-largest pension fund in the Netherlands with €259bn of assets for healthcare and welfare workers, told the Financial Times it was on track to switch to the new system on January 1, 2026. ABP, the nation’s largest, plans to transition the following year.
Rising bond yields are piling pressure on policymakers as Europe increases its borrowing to fund its defence and energy ambitions, led by Germany’s €1tn “whatever it takes” spending plan.
Long-dated Eurozone debt has been hit especially hard. Germany’s 30-year yield has climbed from below zero during the Covid pandemic to more than 3 per cent, close to its highest levels since the Eurozone debt crisis. The additional interest rate paid on France’s 30-year debt, compared with its two-year equivalent, has surged from zero two years ago to more than 2 percentage points.
Dutch pension funds, which are by far the largest in the Eurozone, have used interest rates swaps and government bonds across different time horizons, even over 50 years or more, to match the period over which they must make payouts to their youngest members.
But as funds move to a system where they pay out based on returns, they are set to move towards riskier assets such as equities and credit, which they expect to generate higher returns for their members over the long term.
“There will be a shift away from 50, 40 and 30-year bonds,” said Michiel Tukker, a European rates strategist at Dutch bank ING. “Now the question is . . . who will be the buyer?”
Some other traditional buyers have pulled back. Japanese investors, historically a cornerstone buyer of Eurozone sovereign debt, sold down their holdings at the end of last year at the fastest pace in a decade.
Rabobank estimates that, prior to the debt sales, Dutch pension funds owned around €457bn of government bonds, with the heaviest sales — an estimated combined €69bn — expected in German, French and Dutch sovereign debt.
Some 19 per cent of all government debt in the Netherlands is owned by Dutch retirement funds, compared with an 8 per cent ownership of German Bunds, according to Rabobank, with the ownership ratio highest for bonds with a distant maturity date.
Leading into the pension transition, Dutch funds have been increasing their use of hedging through bonds and swaps to protect their members’ benefits ratio from any interest rate shock or equity market tumble.
“It gives a difficult dynamic, where on the one hand you are incentivised to increase your interest rate hedges going into the transition date, and then after that date you do the opposite trade as fast as possible because you don’t want to be the last one,” said Tukker.
The timing is still uncertain. A handful of pension funds have already delayed their transition date, including PME, a €60bn scheme for workers in the metal and tech industry. But hedge funds are positioning to profit from the transition, analysts said.
“Everyone is trying to prey on this,” said Lyn Graham-Taylor, a senior rates strategist at Rabobank, adding that he was focused on trying to work out “how much are long-end rates going to steepen and how much is already in the price?”
Additional reporting by Ian Smith
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