Insight The shift towards DC: Why Dutch pensions should rethink ETFs

Reassessing the value of ETFs

Dutch pensions are undergoing a significant structural transformation as they move from defined benefit (DB) to defined contribution (DC) plans under the Future of Pensions Act (WTP). The investment playbook that worked well in the DB era may not translate effectively to new DC regulatory requirements, requiring a revisit of old assumptions.

Exchange-traded funds (ETFs), in our opinion, merit more attention from Dutch pensions because of WTP. Once thought of primarily as passive, retail-based vehicles, ETFs now serve as an increasingly important tool that pension investors may consider when implementing investment strategies under the new regulatory regime—yet many Dutch allocators are overlooking them.

Efficiency is key under WTP

WTP is forcing Dutch pension funds to think differently about investment rebalancing and implementation. Portfolios now have established risk profiles and return targets for different participant groups. To meet the requirements of each portfolio, pension allocators need to rebalance frequently and implement investments quickly as markets evolve. Using well-established institutional investment strategies—such as mandates, futures contracts, or individual security selection—may not be efficient enough to keep up.

ETFs may help address some of these implementation challenges as Dutch pensions seek to meet WTP requirements. Depending on the circumstances, ETFs may offer operational and implementation efficiencies—such as intraday tradability, institutional-grade liquidity, transparency into underlying holdings, minimal operational requirements, and potential cost savings—relative to certain alternative approaches like mandates, individual security selection, and futures (see table below). Thousands of ETFs are available across asset classes, geographies, issuers, and sectors, providing allocators with optionality to quickly rebalance and invest within their portfolios.

With these benefits in mind, Dutch pension plans can evaluate how ETFs may add value to a portfolio relative to other institutional investment vehicles and strategies. ETFs may not always be the best solution in every instance, like when a mandate can be customised versus an off-the-shelf ETF strategy, but they may be worth considering to ensure cost, efficiency, and performance are optimised.

ETFs may also complement traditional investment approaches where appropriate. For example, ETFs could be used for gaining temporary exposure to an asset class while a custom mandate is set up or to equitize cash quickly when dividends from individual holdings are paid. The versatility of ETFs makes them an institutionally viable investment vehicle alongside other options available to Dutch pensions.

Revisiting assumptions to identify relevant ETF opportunities

There are long-standing assumptions about ETFs that are worth reassessing as Dutch pensions look to maximise their investment capabilities. One of the most common is that ETFs are retail investment vehicles. In reality, DC funds are among the largest ETF users globally, employing ETFs alongside mandates, futures, and individual securities.

Another misconception concerns scale. Some institutional investors assume ETFs are too small to accommodate allocations of hundreds of millions of Euros. However, ETF liquidity is driven by the tradability of the underlying securities rather than fund size. A pension allocating €700 million through a €500 million ETF may access additional capacity through the ETF share creation/redemption mechanism, subject to market conditions and the liquidity of the underlying securities.

Some allocators may also view ETFs as purely passive investments. While passive strategies remain prominent, ETFs now provide access to active, synthetic, and other institutional strategies. For example, investors can access active fixed income exposures or use synthetic ETFs to potentially reduce withholding taxes on dividends from US equities. Certain synthetic ETF structures may offer different tax treatment characteristics, subject to applicable tax rules and individual investor circumstances. Dutch pensions should seek their own tax advice.

Prominent pension-based ETF use cases

The ways other European pensions are using ETFs translate well to the needs of Dutch DC plans. There are five immediate use cases that can add value under WTP regulation.

1. Cohort rebalancing: If the equity weighting of a portfolio has risen too high, then exposure can be shifted quickly intraday via an ETF.
2. Tactical and strategic allocations: Setting up a mandate can typically take several months and require board approval. An ETF can be traded today—if allowed by the pension—to help provide access to a certain asset class or market efficiently and maintain that position either short or long term.
3. Cash equitisation: ETFs could be used to put cash positions to work immediately, helping to reduce cash drag and maintain risk/return targets.
4. Portfolio completion: For exposures where futures or individual securities may not be widely available or easy to procure, such as emerging markets, ETFs could offer efficient access.
5. Transition management: During the transition from DB to DC or one manager to another, ETFs can help pensions maintain or refine certain investment exposures.

The first step is education

For many pension boards and investment committees, the biggest barrier to harnessing the benefits of ETFs is unfamiliarity with the investment vehicle. ETF providers can play an important educational role and help Dutch pensions adapt their investment toolkits to the demands of the WTP era. Through dedicated capital markets, operational, and investment specialists, asset managers can help pensions better understand ETF mechanics, implementation, and portfolio applications alongside mandates, futures, and individual securities.

Drawing on more than two decades of ETF experience, Invesco offers more than 170 EMEA strategies and a specialised team that can help Dutch pensions explore how ETFs may support their investment objectives during the DB-to-DC transition.

View our full suite of ETF solutions.