Hostname: page-component-848d4c4894-tn8tq Total loading time: 0 Render date: 2024-06-29T13:39:49.807Z Has data issue: false hasContentIssue false
  • English
  • Français

The effect of the Dutch financial assessment framework on the mortgage investments of pension funds

Published online by Cambridge University Press:  09 November 2022

Yeorim Kim  and
Mauro Mastrogiacomo
Yeorim Kim
Affiliation:
VU Amsterdam, Amsterdam, the Netherlands Netspar, Tilburg University, Tilburg, the Netherlands De Nederlandsche Bank, Amsterdam, the Netherlands
Mauro Mastrogiacomo*
Affiliation:
VU Amsterdam, Amsterdam, the Netherlands Netspar, Tilburg University, Tilburg, the Netherlands De Nederlandsche Bank, Amsterdam, the Netherlands
*
*Corresponding author. Email: m.mastrogiacomo@vu.nl
Get access Rights & Permissions [Opens in a new window]

Abstract

We investigate the cause of the increase in mortgage investments by pension funds after the financial crisis. We show that, after the introduction of the new financial assessment framework in 2015, funds that experienced larger reductions in the funding ratio during the 2008–2012 crisis invested more in mortgages. We test the hypothesis that a past recovery mode has motivated pension funds to invest more in mortgages after the crisis. Funds that seek to further hedge their interest rate risks aim for a different risk/return investment profile. Mortgages could contribute to a less risky portfolio, as they have become even safer since the introduction of several new regulations in 2013. Recovery modes after the crisis combined with the new framework are a cause of the recent surge in mortgage holding by pension funds; we find that this led to a 39% increase in their mortgage investments, despite the fact that these are still low relative to the overall investments of pension funds.

Keywords

Mortgage investmentspension fundsG11G21G23
Type
Article
Information
Journal of Pension Economics & Finance , Volume 23 , Issue 1 , January 2024 , pp. 89 - 110
Copyright
Copyright © The Author(s), 2022. Published by Cambridge University Press

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

An, H, Huang, Z and Zhang, T (2013) What determines corporate pension fund risk-taking strategy? Journal of Banking and Finance 37, 597–613.CrossRefGoogle Scholar
Andonov, A, Eichholtz, P and Kok, N (2015) Intermediated investment management in private markets: evidence from pension fund investments in real estate. Journal of Financial Markets 22, 73–103.Google Scholar
Andonov, A, Bauer, RM and Cremers, KJ (2017) Pension fund asset allocation and liability discount rates. The Review of Financial Studies 30, 2555–2595.Google Scholar
Ang, A, Chen, B and Sundaresan, S (2013) Liability-driven investment with downside risk. The Journal of Portfolio Management 40, 71–87.Google Scholar
Barnes, D (2012) Low interest rates impact pension fund hedging strategies. FTSE Global Market 65, 29–31.Google Scholar
Bauer, R, Hoevenaars, R and Steenkamp, T (2006) Asset liability management. In Clark, GL, Munnell, AH and Orszag, JM (eds), The Oxford Handbook of Pensions and Retirement Income, 13th Edn. Oxford, England: Oxford University Press.Google Scholar
Bédard-Pagé, G, Demers, A, Tuer, E and Tremblay, M (2016) Large Canadian public pension funds: a financial system perspective. Bank of Canada Financial System Review (June), 33–38.Google Scholar
Beetsma, R, Constandse, M, Cordewener, F, Romp, W and Vos, S (2015) The Dutch pension system and the financial crisis. CESifo DICE Report 2, 14–19.Google Scholar
Boon, LN, Brière, M and Rigot, S (2018) Regulation and pension fund risk-taking. Journal of International Money and Finance 84, 23–41.Google Scholar
Bouvatier, V and Rigot, S (2013) Pension funds’ allocations to hedge funds: an empirical analysis of US and Canadian defined benefit plans. Applied Economics 45(26), 3701–3710.Google Scholar
Broeders, DW, Jansen, KA and Werker, BJ (2021) Pension fund's illiquid assets allocation under liquidity and capital requirements. Journal of Pension Economics & Finance 20(1), 102–124.Google Scholar
Chemla, G (2005) The determinants of investment in private equity and venture capital: evidence from American and Canadian pension funds. Available at SSRN 556421.Google Scholar
Defau, L and De Moor, L (2021) The investment behaviour of pension funds in alternative assets: interest rates and portfolio diversification. International Journal of Finance and Economics 26(1), 1424–1434.Google Scholar
De Nederlandsche Bank (2011) Adequate Liquidity Management a Prerequisite for Interest Rate Hedging by Dutch Pension Funds. Amsterdam: De Nederlandsche Bank.Google Scholar
De Nederlandsche Bank (2012) UFR Provides a Beacon for Pensions in Turbulent Markets. Amsterdam: De Nederlandsche Bank.Google Scholar
De Nederlandsche Bank (2013) Pension Sector Hedges Half the Interest Rate Risk. Amsterdam: De Nederlandsche Bank.Google Scholar
De Nederlandsche Bank (2014) Investment Mix and Interest Rate Hedging Decisive for Pension Fund Recovery. Amsterdam: De Nederlandsche Bank.Google Scholar
De Nederlandsche Bank (2015) The Effects of a Lower LTV Limit. Amsterdam: De Nederlandsche Bank.Google Scholar
De Nederlandsche Bank (2016a) European Stress Test Confirms Vulnerabilities of Pension Funds. Amsterdam: De Nederlandsche Bank.Google Scholar
De Nederlandsche Bank (2016b) Overview of Financial Stability. Amsterdam: De Nederlandsche Bank.Google Scholar
De Nederlandsche Bank (2016c) Focus on Banking Mortgage Portfolios. Amsterdam: De Nederlandsche Bank.Google Scholar
De Nederlandsche Bank (2017) Reporting Instructions for Mortgage Loan-Level Data Survey. Amsterdam: De Nederlandsche Bank.Google Scholar
Derrien, F and Kecskés, A (2013) The real effects of financial shocks: evidence from exogenous changes in analyst coverage. The Journal of Finance 68(4), 1407–1440.Google Scholar
DNB Statistics (2019) Indexation Base of Current and Old-Age Pension Benefits. Amsterdam: De Nederlandsche Bank.Google Scholar
Dodds, LS (2015) Credit: Dutch mortgage market thrives as investors pour in. Investment & Pensions Europe. Available at https://www.ipe.com/credit-dutch-mortgage-market-thrives-as-investors-pour-in/10007794.article.Google Scholar
Dyck, A and Pomorski, L (2016) Investor scale and performance in private equity investments. Review of Finance 20(3), 1081–1106.CrossRefGoogle Scholar
Fixsen, R (2019) Becoming a mortgage lender. Available at https://www.ipe.com/becoming-a-mortgage-lender/10030900.article.Google Scholar
Gerber, DS and Weber, R (2007) Demography and investment behavior of pension funds: evidence for Switzerland. Journal of Pension Economics & Finance 6(3), 313–337.Google Scholar
Gertler, PJ, Martinez, S, Premand, P, Rawlings, LB and Christel, MJV (2010) Impact Evaluation in Practice: Ancillary Material. Washington, DC: The World Bank. Available at www.worldbank.org/ieinpractice.Google Scholar
Grove, MA (1974) On ‘duration’ and the optimal maturity structure of the balance sheet. The Bell Journal of Economics and Management Science 5(2), 696–709.CrossRefGoogle Scholar
Gujun, E (2021) Mortgage funds: alternative fixed income, or just the new traditional? Available at https://hedgenordic.com/2021/12/mortgage-funds-alternative-fixed-income-or-just-the-new-traditional/.Google Scholar
Hale, T (2016a) Dutch lenders lose ground in battle for new mortgage market. Financial Times. Available at https://www.ft.com/content/006f0238-cc34-11e5-a8ef-ea66e967dd44.Google Scholar
Hale, T (2016b) Non-banks shake up Dutch mortgages. Financial Times. Available at https://www.ft.com/content/2c8045a2-c77f-11e6-9043-7e34c07b46ef.Google Scholar
Hoekert, W and Troost, GJ (2015) FTK: will the new rules change Dutch pension funds’ attitude to risk? Investment & Pensions Europe. Available at https://www.ipe.com/pensions/pensions-in/netherlands/ftk-will-the-new-rules-change-dutch-pension-funds-attitude-to-risk/10006889.fullarticle.Google Scholar
Hoekert, W, Kool, A, Jonk, M and Elias, M (2018) Evaluatie Wet Aanpassing Financieel Toetsingskader. Amstelveen, the Netherlands: Willis Towers Watson.Google Scholar
Inglis, RE, Bosse, P and Zahm, N (2013) Pension plan immunization strategies: how close can you get? Vanguard research. Vanguard Center for Retirement Research. Vanguard Investment Strategy Group. Available at https://pressroom.vanguard.com/nonindexed/6.7.2013_Pension_Plan_Immunization_Strategies.pdf.Google Scholar
Jansen, K and Tuijp, P (2021) A survey of institutional investors’ investment and management decisions on illiquid assets. The Journal of Portfolio Management 47(3), 135–153.Google Scholar
Keintz, RJ and Stickney, CP (1980) Immunization of pension funds and sensitivity to actuarial assumptions. The Journal of Risk and Insurance 47(2), 223–239.Google Scholar
Kim, Y, Mastrogiacomo, M, Hochguertel, S and Bloemen, H (2019) Is additional indebtedness the way to increase mortgage-default insurance coverage? Netspar Design Paper 115, 1–43.Google Scholar
Leeuwen, RV and Bokeloh, P (2012) Mortgage Market in the Netherlands. Amsterdam: ABN AMRO. Available at https://www.abnamro.nl/nl/images/Generiek/PDFs/020_Zakelijk/04_Service/Economisch_bureau/Specials/Speciale_uitgaven_4_van_5.pdf.Google Scholar
Leibowitz, ML (1986) The dedicated bond portfolio in pension funds: part II: immunization, horizon matching and contingent procedures. Financial Analysts Journal 42(2), 47–57.CrossRefGoogle Scholar
López-Villavicencio, A and Rigot, S (2013) The determinants of pension funds’ allocation to private equity. Available at SSRN 2363356.Google Scholar
Mastrogiacomo, M and Van der Molen, R (2015) Dutch mortgages in the DNB loan-level data. Occasional Studies, 13-4. Amsterdam: De Nederlandsche Bank.Google Scholar
Mohan, N and Zhang, T (2014) An analysis of risk-taking behavior for public defined benefit pension plans. Journal of Banking and Finance 40, 403–419.Google Scholar
Mulvey, JM, Gould, G and Morgan, C (2000) An asset and liability management system for Towers Perrin-Tillinghast. Interfaces 30(1), 96–114.Google Scholar
Nederlandse Verenigning van Banken (NVB) (2016) Fact Sheet Housing and Mortgage Market. Amsterdam: Nederlandse Verenigning van Banken (NVB).Google Scholar
Novy-Marx, R and Rauh, JD (2009) The liabilities and risks of state-sponsored pension plans. Journal of Economic Perspectives 23(4), 191–210.Google Scholar
Pennacchi, G and Rastad, M (2011) Portfolio allocation for public pension funds. Journal of Pension Economics and Finance 10(2), 221–245.Google Scholar
Shu, L, Melenberg, B and Schumacher, H (2016) An evaluation of the nFTK. Netspar Industry Paper.Google Scholar
Spaan, F (2012) Regulatory Capital Requirements under FTK and Solvency II for Pension Funds. Tilburg: Netspar. Available at http://arno.uvt.nl/show.cgi?fid=129796.Google Scholar
Trappenburg, N (2015) Dutch pension funds commit €750 m to mortgages. Investment & Pensions Europe. Available at https://www.ipe.com/dutch-pension-funds-commit-750 m-to-mortgages/10006271.article.Google Scholar
Van Stee, A (2019) Ultimate forward rate for pension funds. Available at https://home.kpmg/nl/nl/home/insights/2017/04/ultimate-forward-rate.html.Google Scholar
Willis Towers Watson (2019) Global pension assets study 2019. Available at https://www.thinkingaheadinstitute.org/content/uploads/2020/11/GPAS_2019_final-1.pdf.Google Scholar
Wong, D (2018) Canadian pensions can't buy your mortgages fast enough. Available at https://betterdwelling.com/canadian-pensions-cant-buy-mortgages-fast-enough/.Google Scholar
Supplementary material: File

Kim and Mastrogiacomo supplementary material
Download undefined(File)
File 159.4 KB