Dutch pension funds are prepping for big reforms

Dutch pension funds are on the verge of significant reforms and 2025 will be all about preparing for that transition. The strong reliance on longer-dated fixed receiver swaps for managing interest rate risks means that swap markets will be impacted. In essence, the reforms are about shifting assets from Defined Benefits (DB) schemes to a Defined Contributions (DC) model. Around €600bn of assets are expected to transition in 2026, most on 1 January, making 2025 an important year.

Even though longer-dated swaps will be of less importance under the new model, in 2025 we expect the demand for fixed receivers to remain elevated. To ensure a smooth transition process, pension funds have an incentive to reduce the volatility of their assets and liabilities.

On the day of transition (e.g. 1 January 2026), assets are allocated to the participants based on individual future liabilities and to fund-wide reserves. To prevent a situation where participants are forced to take pension cuts, funds are incentivised to reduce market risk exposure in the months leading to the date of transition.

The uncertainty around Trump’s presidency in 2025 forms a key risk to the transition in our view, since a scenario with falling equity prices and lower EUR rates would hurt funding ratios significantly. A reduced risk appetite can be expressed through increased interest rate hedges, which have already increased over the past years. We will be watching the funding ratios of some of the larger funds, and if these show sharp drops, then we foresee further demand for fixed receivers.  

The new Defined Contribution model reduces the need for fixed receiver swaps for 30 years and beyond. We, therefore, believe that funds will already move to 20y tenors to steer interest rate risks until the transition. Any shorter tenors will fail to cover the risks stemming from longer-dated liabilities, which will still need to be covered until the transition date. Longer tenors would fall obsolete after the transition date.

Our analysis suggests that funds have already reduced the duration of their derivatives portfolio from around 27 to 23 years, in line with our working hypothesis. After the reforms, Dutch pension funds will require fewer long-dated hedges, and thus we expect less demand for 30Y fixed receivers and more for 20Y swaps.

We stick to our view that the 20s30s EUR swap curve can steepen further. Our fair value model suggests the currently inverted slope should revert to a positive slope again, potentially already in 2025, and the Dutch pension fund dynamics should support the broader steepening trend.

Going forward, we expect Dutch pension funds to remain risk-averse and any market moves against them could further increase interest rate hedges. Increased hedging demand may have even already played a role in accelerating the recent swap spread moves and will continue to have an impact.