Market Mover - BNP PARIBAS - Investment Services India

EUR: Monitoring Dutch Pension Funds
• Asset allocation and duration risk analysis
suggest that pension funds remain very
sensitive to swap curve and equity gyrations.
According to official DNB data and given swap and
equity markets’ evolution over the past four months,
we estimate the industry-wide cover ratio for Dutch
pension funds to be around 106%. This is a minor
deterioration from the 109% reported in Q3 2009.
However, the interesting issue is more related to
duration risks and less to solvency risks. In Chart 1,
we show the evolution of assets, liabilities and cover
ratios for Dutch pension funds. Also, we show a
variable called “duration gap”, a measure of the
sensitivity of pension fund portfolios to asset and
liability dynamics. Notably, the duration gap has not
improved in line with cover ratios and remains at very
high levels (EUR 325bn 30Y risk). This is an
indication that aggregate Dutch pension funds did not
make significant changes to their asset allocation in
2009, i.e. they have not used the proceeds from the
rally in risky assets to hedge some of their asset vs
liability mismatch. We validate this assumption by
looking at the evolution of simplified asset allocations
in recent years. In Chart 2, we can see that the
estimated 2009 bond/equity allocation has not
changed significantly from reported 2008 levels.
Conclusion: We think Dutch pension funds are more
sensitive to equity and swap curve volatility than
previously thought on the basis of 2009’s rally in risky
assets. As such, an equity sell-off coupled with bull
flattening of 10/30s remains the pain trade.
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Chart 1: Cover Ratio vs Duration Gap
EUR bn
Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09
EUR bn
Assets
Technical provision
Funding ratio
LIVE
1997 1999 2001 2003 2005 2007 Q3/09
Source: BNP Paribas, DNB
55%
50%
45%
40%
35%
30%
25%
Chart 2: Asset Allocation
Equities
Duration gap (30Y risk)
1997 1999 2001 2003 2005 2007
Source: BNP Paribas, DNB
Fixed income
2009 (Est.)
160%
140%
120%
100%
80%
60%
Live
COVER RATIO PROJECTION - RISK SCENARIO: BULL FLATTENING
SWAP CURVE
EQUITY
10Y -100 -90 -80 -70 -60 -50 -40 -30 -20 -10 0 10 20 30 40 50 60 70 80 90 100
30Y -110 -99 -88 -77 -66 -55 -44 -33 -22 -11 0 11 22 33 44 55 66 77 88 99 110
CURVE 0.25 0.26 0.27 0.28 0.29 0.30 0.31 0.32 0.33 0.34 0.35 0.36 0.37 0.38 0.39 0.40 0.41 0.42 0.43 0.44 0.45
-50 73% 74% 75% 76% 77% 79% 80% 81% 82% 83% 85% 86% 87% 89% 90% 91% 92% 94% 95% 96% 97%
-45 75% 76% 77% 78% 79% 81% 82% 83% 84% 86% 87% 88% 89% 91% 92% 93% 95% 96% 97% 99% 100%
-40 76% 77% 79% 80% 81% 82% 84% 85% 86% 88% 89% 90% 92% 93% 94% 96% 97% 99% 100% 101% 103%
-35 78% 79% 80% 82% 83% 84% 86% 87% 88% 90% 91% 93% 94% 95% 97% 98% 100% 101% 102% 104% 105%
-30 80% 81% 82% 84% 85% 86% 88% 89% 90% 92% 93% 95% 96% 98% 99% 100% 102% 103% 105% 106% 108%
-25 81% 83% 84% 85% 87% 88% 90% 91% 92% 94% 95% 97% 98% 100% 101% 103% 104% 106% 107% 109% 110%
-20 83% 84% 86% 87% 89% 90% 92% 93% 94% 96% 97% 99% 101% 102% 104% 105% 107% 108% 110% 111% 113%
-15 85% 86% 88% 89% 91% 92% 93% 95% 97% 98% 100% 101% 103% 104% 106% 107% 109% 111% 112% 114% 115%
-10 87% 88% 89% 91% 92% 94% 95% 97% 99% 100% 102% 103% 105% 107% 108% 110% 111% 113% 115% 116% 118%
-5 88% 90% 91% 93% 94% 96% 97% 99% 101% 102% 104% 105% 107% 109% 110% 112% 114% 115% 117% 119% 120%
0 90% 92% 93% 95% 96% 98% 99% 101% 103% 104% 106% 108% 109% 111% 113% 114% 116% 118% 120% 121% 123%
5 92% 93% 95% 96% 98% 100% 101% 103% 105% 106% 108% 110% 112% 113% 115% 117% 119% 120% 122% 124% 126%
10 94% 95% 97% 98% 100% 102% 103% 105% 107% 108% 110% 112% 114% 116% 117% 119% 121% 123% 125% 126% 128%
15 95% 97% 98% 100% 102% 103% 105% 107% 109% 110% 112% 114% 116% 118% 120% 121% 123% 125% 127% 129% 131%
20 97% 99% 100% 102% 104% 105% 107% 109% 111% 113% 114% 116% 118% 120% 122% 124% 126% 128% 130% 131% 133%
25 99% 100% 102% 104% 106% 107% 109% 111% 113% 115% 117% 118% 120% 122% 124% 126% 128% 130% 132% 134% 136%
30 100% 102% 104% 106% 107% 109% 111% 113% 115% 117% 119% 121% 123% 125% 127% 128% 130% 132% 134% 136% 138%
35 102% 104% 106% 107% 109% 111% 113% 115% 117% 119% 121% 123% 125% 127% 129% 131% 133% 135% 137% 139% 141%
40 104% 106% 107% 109% 111% 113% 115% 117% 119% 121% 123% 125% 127% 129% 131% 133% 135% 137% 139% 141% 143%
45 106% 107% 109% 111% 113% 115% 117% 119% 121% 123% 125% 127% 129% 131% 133% 135% 138% 140% 142% 144% 146%
50 107% 109% 111% 113% 115% 117% 119% 121% 123% 125% 127% 129% 131% 134% 136% 138% 140% 142% 144% 146% 149%
Alessandro Tentori 12 February 2010
Market Mover, Non-Objective Research Section
22
www.GlobalMarkets.bnpparibas.com