Medicine and finance can be seen as two very distant disciplines. Perhaps pension fund management is where the two disciplines find common ground. When it comes to pensions, a finance practitioner must be able to think and act with a long-term objective in mind and to put the well-being of its clients above everything else, as a healthcare professional would deal with a patient.

That common ground is a strong foundation for Stichting Pensioenfonds Medisch Specialisten (SPMS), the pension fund for self-employed medical specialists in the Netherlands, whose board consists of nine doctors and is heavily involved in the management of the fund.

There are several aspects that set SPMS apart from other Dutch pension funds, starting from the relatively high level of hedging against interest-rate risk. Marcel Roberts, chief investment officer at SPMS, says: “We hedge 78% of the liabilities’ interest-rate risk and that level has been at higher levels for a decade now. We had such a high level of hedging even when interest rates were at rock bottom. Our board’s thinking is very much rooted in seeing SPMS as long-term investors.”

The hedging is implemented partly thanks to a large book of interest-rate swaps. The use of derivatives for pension risk management purposes came under the spotlight at the end of September last year. That was when defined benefit pension schemes in the UK were caught up in a liquidity crisis, caused by a sudden rise of interest rates that forced them to post collateral on their swaps all at the same time.

Pension funds in the Netherlands, which also make extensive use of swaps, took notice. “We have been discussing whether we should review our collateral management approach and our hedging strategy more generally,” says Roberts.

He points out that Dutch pension funds are regularly asked to report on their derivatives portfolios by the Dutch central bank. The regulator wants to ensure, among other things, that pension funds can fulfil their collateral management obligations.

“We have not made any changes to our asset mix in our hedging strategy in response to what happened in the UK. However, we are considering adding a scenario with larger rates and currency shocks to our stress-test policy, versus the existing scenarios of the Dutch central bank, to make sure that we always have enough liquid assets in our portfolio should we need to post additional collateral,” Roberts says.

The UK liquidity crisis prompted questions about collateral management but also about overall strategic asset allocation, adding to the uncertainty related to pension reform in the Netherlands. SPMS, like many other pension funds in the country, will have to consider what is the appropriate level of allocation to illiquid assets.

Dutch pension funds face a choice between essentially two arrangements.

Which of the two arrangements is more conducive to investment in illiquid assets remains to be seen. “In anticipation of the new pension system, we are taking a break in terms of new long-term commitments to investments in illiquid assets, at least until our participants have chosen which system they want. Therefore it is too early to say to what extent the portfolio will change,” says Roberts.

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