How the new pension system affects the investment policy of pension funds

BNR Nieuwsradio
Erasmus School of Economics

All trade union members have agreed on the new pension system. In this system, pension benefits depend on developments on the stock market. Mary Pieterse-Bloem, Professor of Financial Markets at Erasmus School of Economics and Head Fixed Income at ABN AMRO, explains on the Dutch radio station BNR Nieuwsradio how this new pension system will affect the investment policy of pension funds.

Interesting shift

According to Pieterse-Bloem, the new system will affect the investment policy of pension funds for two reasons: pension funds do not have to make any promises anymore and therefore also abandon the link with interest rates. This could lead to less hedging among pension funds, which in turn would have an effect on the interest rate curve. This is interesting for investors since pension funds are given the opportunity to invest by age group, meaning they will take more risk for younger age groups and less risk for older groups. This could influence the investment mix of equities and bonds, leading to an interesting shift of investment funds in the Netherlands.

Low interest rates

It still remains to be seen how much the new pension system will ultimately yield. This namely depends on the age of the participants of the pension fund in question. It also depends on how the pension funds deal with, for example, the investments in bonds for the older age group. Bond investments are currently at an interest rate close to 0% and it is therefore questionable whether pension funds will find it wise to make these investments. According to Pieterse-Bloem, it is important that pension funds think about this very carefully.

Own pocket of investments

The new pension system also means that the funds will be more volatile. However, it does not necessarily mean that the system is therefore worse than before. Especially for young people, the new system can yield many benefits. Even the elderly will not necessarily be worse off. According to Pieterse-Bloem, this is because pension funds do not have to make cuts anymore. People are even talking about indexing pensions again. Especially now, it is important to encourage young people to pay more attention to their pensions and what happens with their funds. Based on the investment mix, they could choose to switch pension funds. Pieterse-Bloem believes this might not be as easily said than done, but she does think that young people should at least start investing themselves, as an addition to their pensions, especially with the current low savings rate.

Professor
More information

The full item from BNR Nieuwsradio, 7 July 2020, can be found here (in Dutch).