The €88 billion in divestments represented approximately 4.6% of pension funds’ total invested assets. Never before have they sold such a large proportion of their assets over a six-month period.
Broken down by asset class, investment fund units (€57 billion) and money market fund units (€8 billion) were mostly sold. In addition, they divested €25 billion worth of listed equities. In terms of net purchases, Dutch pension funds invested in bonds to a limited extent (€2 billion).
Rising interest rates push up margin requirements
Interest rates rose steeply in the first half of 2022. This is good news for pension funds, whose liabilities fell, causing funding ratios to go up.
Increased interest rates also have another consequence, however. Pension funds hedge part of the interest rate risk they run on their liabilities by entering into interest rate derivatives (see box). When interest rates fall, these derivatives increase in value and thus partly compensate for the higher present value of future pension liabilities. Conversely, their value falls when interest rates rise.
When that is the case, their value can turn into a debt owed to the counterparty. Counterparties with which these contracts are concluded require collateral against such debts in the form of a margin requirement, i.e. a ringfenced bank account. With interest rates rising rapidly, the value of the interest rate derivatives decreases (i.e. becomes more negative) and the associated margin requirements go up.
Pension funds contributed €82 billion to margin accounts in the first six months of 2022, partly from the proceeds of assets they sold.