Dutch DC reform: Eyes on the bond markets as funds step up risk

Pension funds in The Netherlands have kicked off 2026 by switching to a new defined contribution system, swapping the country’s defined benefit system and tying pay-outs to contributions and market returns instead. 

Pension funds with assets accounting for almost a third of the country’s €1.6 trillion ($1.87 trillion)  pension system have made the change. Another $1 trillion is planned to transition next year in time for the January 2028 deadline, in a complex process that has been 10  years in the making and involves navigating regulatory hurdles, IT issues and administrative challenges. 

“The launch of the new scheme is good news for all participants and pensioners. We now have a pension that is more future-proof; can grow more easily in good times, and is still well-protected in bad times,” states Pensioenfonds Zorg en Welzijn (PFZW), the €250 billion Dutch healthcare fund, one of the funds to transfer to the new system. 

Meanwhile, ABP, Europe’s largest pension fund with over €500 billion under management and accounting for around a third of the sector’s total assets under management, says it will transition to the new system in January 2027. 

The reforms will allow Europe’s largest pension funds to buy riskier assets and move away from strategies that have favoured long-term interest-rate hedging and matching assets very closely to liabilities. 

Many Dutch funds have run dynamic asset and liability management strategies where a matching and return portfolio, and an interest-rate hedging strategy, all moved in line with funding ratios. This investment approach, which has been encouraged by strict regulation steering funds to focus on short-term stability and guarantees rather than tilting towards risk-taking and long-term returns, has also thrived in a low-interest-rate world. 

Impact on the bond market

But Europe’s largest pension sector is expected to push into riskier assets and buy less long-dated government bonds just as European governments face record funding needs. 

Government bonds make up a significant portion of Dutch pension funds’ balance sheet. Research from ING Netherlands estimates fixed income accounts for €729 billion of the country’s pension sector; equities account for €439 billion, real estate €154 billion, private equity €95 billion, infrastructure €60 billion and ‘other’ investments €122 billion. 

Many investors welcome the shift from “overdone hedging strategies” that have come at the expense of returns. 

But any push into equities and riskier assets will depend on the risk preference of scheme members. Moreover, only pension funds with young beneficiaries are expected to change their asset mix and beef up their allocation to equities and alternatives and reduce their exposure to fixed income. 

For example, Imke Hollander, senior advisor to the investment committee at PWRI, the €10 billion pension fund for people with disabilities, said the fund is on a de-risking trajectory because it doesn’t have many young participants joining despite it still being an open fund. Moreover, she said the pension fund’s risk appetite is unlikely to extend beyond an existing 50 per cent allocation to equity and real estate anyway. 

In conversation with Top1000funds.com last November, outgoing chief executive officer Ronald Wuijster at APG Asset Management, which manages ABP’s giant portfolio, argued that structural changes are also essential to enable Europe’s pension funds to successfully take more risk in a continent where the capital markets offer thin pickings. 

He listed roadblocks like Europe’s fragmented insolvency legislation, which differs between countries. The absence of a capital markets union also makes it hard for fast-growing companies to access the finance they need to grow and fire up a competitive European economy. European member states’ deeply-held national differences also thwart the prospect of a capital markets union alongside a deep psychology of risk aversion. 

Under the Dutch reforms, pension funds will choose between two different types of DC schemes, either a “solidarity contract” where the fund decides on the investment mix or a “flexible contract” where the member can choose their own investment mix. 

It means the new regulation will trigger a sharp uptick in compulsory communication with beneficiaries, as well as time-consuming board approvals for every change to ensure different stakeholders, including unions and employers, are on board.