Dutch Pension Overhaul to Fuel Pivot From Long Bonds in EU
TL;DR
Dutch pension reforms shifting to defined contribution models will reduce demand for long-dated bonds, prompting European governments to shorten debt maturities. This will lower borrowing costs but increase refinancing risks as countries issue more shorter-term debt.
Key Takeaways
- •Dutch pension system overhaul to defined contribution models will significantly reduce demand for long-maturity bonds across Europe
- •European governments like Austria and the Netherlands plan to shorten debt maturities in response, potentially lowering interest costs but increasing refinancing frequency
- •The shift mirrors similar moves in the UK and Japan where pension fund changes have already reduced long-bond issuance
- •Dutch pension funds hold about 65% of euro area pension funds' sovereign bond holdings, making their asset allocation changes particularly impactful
- •The changes come as governments face increased borrowing needs for defense and infrastructure spending with reduced central bank support
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European nations look set to lower the length of their borrowing as an overhaul of the Dutch pension system reduces demand for longer-maturity bonds.
Changes may be announced in coming weeks as governments unveil bond issuance plans for 2026. In an early sign of what lies ahead, Austria’s debt chief said this week that it has “room to go lower” in the average maturity of its debt after years of targeting longer tenors.
Adopting shorter-dated borrowing in the euro zone would follow similar moves in the UK and Japan. Such a shift will likely lower interest payments given the higher compensation investors demand to hold longer bonds, yet it also leaves governments more exposed to yield rises as they return to the market more frequently to refinance maturing debt.
The potential changes follow a move by Dutch pension funds to a defined contribution model over the next two years, which means their purchases of ultra-long bonds are likely to fall as they no longer need to match assets against liabilities. Most transitions are set to take place from the start of next year.
Nowhere is the shift in bond demand expected to be felt more than in the Netherlands itself, given Dutch pension funds’ home bias for domestic debt. The Dutch State Treasury Agency is likely to reduce its average maturity target from a minimum of eight years, perhaps to a six-to-eight year range, according to Jaap Teerhuis, a senior rates strategist at ABN Amro Bank NV.
Explainer: Dutch Pension Changes Will Ripple Through Swap Market
“It makes sense for the DSTA to issue much less in the long end compared to what they have issued in the last few years,” said Teerhuis, who previously headed the debt agency’s dealing room. There’s an “expectation that debt management offices will reduce issuance in the long end, mainly because of the increased cost of funding.”
A DSTA spokesperson declined to comment. It is due to announce its funding plan for 2026 as well as update its long term strategy on average maturity next week.
While the Netherlands accounts for just 7% of the euro area’s economy, the pension system is an outsized market player. It makes up about 65% of pension funds’ sovereign bond holdings in the region, according to the European Central Bank.
Read: ECB Warns Dutch Pension Reform Risks Spurring Bonds Selloff
Until now, these funds have relied heavily on long-dated assets — typically interest-rate swaps and bonds — to ensure they have enough cash to pay pensioners down the line, irrespective of market moves. For years, that’s been a boon to European governments who can sell these bonds to lock in financing costs for decades.
“We do not think Dutch pension funds will switch from European government bonds to a completely new asset class, but will rather shorten their duration,” Markus Stix, Managing Director of Austria’s Treasury, said in an interview. “We will hopefully see higher demand in other points on the curve.”
Average maturity nears top of current 10.25-11.75 target range
Note: 2025 data point is preliminary estimate
Austria’s Treasury is maintaining a target maturity range for its debt portfolio of between 10.25 to 11.75 years for 2026, according to its funding plan published Thursday. “With the average maturity likely reaching around 11.5 years at the end of 2025, there’s room to go lower within the target band,” Stix said.
Read More: Dutch Pension Move Spurs Maturity Rethink at Century-Bond Issuer
A similar change in demand from the UK’s domestic pension funds has seen the country’s Debt Management Office slash its sales of long bonds to a record low this year. On Friday, it said there will be no conventional sales of long-dated gilts next quarter. Japan has also tilted issuance, as a global yield-curve steepening trend has increased long-term borrowing costs.
Public issuers “are skewing issuance towards shorter-dated bonds because the longer ones are rather more expensive and they see more demand for the shorter ones,” said April LaRusse, head of investment specialists at Insight Investment.
What Bloomberg Strategists Say...
“The Netherlands’ pension system, the biggest in the euro area, is shifting toward a fully defined contribution scheme by 2027. That will lead to reduced demand for interest-rate risk hedges at the farther reaches of the curve, exposing swap rates and bonds.”
— Ven Ram, macro strategist. For full analysis, click here.
Shifts in demand for bonds are in particular focus in Europe given a pivot among governments toward bigger defense and infrastructure spending. With central banks including the ECB shrinking portfolios accumulated during years of quantitative easing, there’s now greater impetus on private buyers to absorb the debt supply hitting the market.
That will be a concern to sovereign issuers who have developed a niche for ultra-long issuance. Austria has century bonds, while France issues 50-year debt. Others such as Germany only sell out to 30 years.
“The French issuance in the ultra long part of the curve can be impacted by the pension-fund transition as there will be less demand,” ABN Amro’s Teerhuis said.