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The CPB reached its conclusion after considering the combined effect of extra returns and the hedging of interest risk on liabilities at DB schemes.
At the request of pensions think-tank Netspar, the CPB compared the Social and Economic Council’s (SER) two preferred options for a new pensions contract – collective DB without guarantees and individual pensions accrual with shared investment risk, as well as individual DC contracts without risk-sharing.
Marcel Lever, programme leader at the CBP, said 7 percentage points of the extra return produced by DB plans were due to shared investment risk between current and future generations, which enables DB schemes to take on more investment risk.
He attributed the remaining 13 percentage points to a 25% interest hedge through swaps, on top of the interest cover through bond holdings.
“At individual contracts, it is uncommon to hedge interest risk this way,” Lever said.
He explained that, with interest swaps, pension funds always receive the long-term rate and pay the short variable rate.
“Because the long rate is almost always higher, this construction delivers an additional return of 1.5% on average in the long run,” he said. “In most of our scenarios, a hedge of between 60% and 100% is beneficial.”
Lever said it was still unclear whether an interest hedge would also apply to a pensions contract based on individual accrual with risk-sharing.