Especially for liabilities with maturities of more than five years, funds do not fully hedge the risk of rate changes. Rate changes may also have consequences for pension funds' liquidity position. While the survey shows that pension funds need not run into liquidity problems if interest rates rise, adequate management of the liquidity risk remains of the essence.
Pension funds’ financial position is sensitive to (long-term) interest rate changes. As investments have short-term maturities and liabilities long-term, their interest rate sensitivity is usually lower than that of liabilities. This implies that a pension fund's financial position weakens in the event of an interest rate decrease. Indeed, an interest rate change has a more marked impact on the value of the liabilities than on that of the investments. Pension funds have various options to protect themselves against interest rate movements, e.g. buying long-term bonds or using derivatives, like interest rate swaps. If opting for an interest rate swap, a fund will periodically receive a fixed interest in exchange for payment of a variable (short-term) interest (see Figure 1).