Dutch pension funds lack clear policies for their investments in residential mortgages, according to regulator De Nederlandsche Bank (DNB).A survey of mortgage portfolios and risk management by the regulator suggested schemes usually adopted the policies of their providers. Instead, schemes should develop their own policies, including targets and limitations, DNB said.Currently there is no link between a scheme’s asset-liability management study and its investment beliefs, the regulator said. It added that pension funds often did not provide clarity about their risk attitude towards illiquid investments either. Residential mortgages as an asset class has gained in popularity during the past few years, as mortgages are considered a better-performing alternative to low-yielding government bonds.Dutch pension funds have invested 2.4% of their portfolio in residential mortgages on average, with some schemes having exposures of as much as 20% of their portfolios, according to DNB.The regulator said that it wanted pension funds to develop their own policy,In its opinion, schemes’ policies should also include the proportion of state-guaranteed mortgages (NHG) in their portfolio, the desired duration of the allocation and the types of mortgages owned.The watchdog also emphasised that pension funds must establish the risk and return criteria for mortgage investments and subsequently opt for a matching product, rather than the other way round.DNB added that pension funds must explain how their mortgage holdings fit with their policy on hedging liabilities.It found that many schemes had fully factored in mortgages into their interest rate hedging policy. Others had merely modestly underpinned this decision, in particular in case of a high debt-market value ratio of the portfolio.The supervisor also said pension funds should explain how they had valued their mortgage holdings, and how they assessed the risk of mortgages paid off early.It warned that just using mortgage providers’ quote could improperly affect the valuation of the holdings.During its survey, the regulator also assessed the outsourcing of asset management and visited a number of undisclosed providers of mortgage investments.