FX Risk Hits Dutch Pension Funds Harder than Stock Prices: Central Bank

Data from De Nederlandsche Bank (DNB) looking at The Netherlands’ pension fund sector, finds that FX risk, in particular the weaker dollar, hit the country’s funds harder than falling equity prices.

In the first quarter of 2025, a period highlighted by dollar weakness, DNB says the total value of Dutch pension funds’ investments fell 3% to €54 billion. In foreign investments, negative exchange rate movements in particular contributed to the losses, it says, whilst highlighting that a “substantial” part of the FX effect was offset by pension funds’ derivatives.

Almost half of the almost EUR 1.8 trillion in Dutch pension fund assets are held offshore, including EUR 551 billion in dollar-based investments (EUR 450 billion of which are in the US itself). The effect was strongest for the dollar: losses due to exchange rate movements amounted to €24 billion (-4%), DNB says, adding that for other currencies, losses amounted to €3 billion (-1%).  On top of that, there were also losses due to falling stock prices of €11 billion on all investments in foreign currencies (-1.3%) and of €16 billion on investments in euro (-1.7%). 

After the first quarter the US dollar continued to fall, which resulted in a decrease by another -4.9% at the end of May, a negative foreign exchange effect of about €27 billion, while stock prices actually recovered. The leading S&P index, for example, rose by 5.3%. Bond prices fell. The estimated price gain on US dollar investments was around €14 billion. 

The good news is that in Q1 pension funds made a gain of €11 billion on their FX derivatives, offsetting some 40% of their FX losses. DNB notes, however, that pension funds do not typically hedge their entire foreign exchange risk, for instance due to the costs associated with derivatives. They must also be backed by blocked accounts as collateral, which means the money on these accounts cannot be invested.

DNB says local funds mainly hedge their currency risk on fixed-income securities, and do not hedge their equity investments, or only to a limited degree, because the trend in stock prices is often opposite to that of the dollar. “This opposite correlation further limits the overall risk that pension funds face with respect to their foreign exchange investments,” DNB states. “Over the last five years, some 40% of the foreign exchange risk has been offset in this way.”  

The report should provide more food for thought for a financial industry sector already under the pump on its approach to FX risk, especially given what seems to be the current US administration’s policy of pursuing a weaker dollar. DNB also observes that the usual diversification offered by stock and the dollar, broke down in Q1, with both falling. “This was partly linked to uncertainties surrounding the policies of the new US administration,” DNB states, which is something that may continue to exist.