Falling coverage ratios could force Dutch pension funds to increase their fixed income allocations to reduce risk, according to AXA Investment Managers.
Speaking at a recent conference organised by IPE sister publication Pensioen Pro, Hanneke Veringa, country manager AXA IM, noted that fixed income investments had risen sharply between 2007 and 2011 but remained unchanged since then.
She said interest rates posed the largest risk for pension funds, “as a movement of a single percentage point has a 10-percentage-point effect on a scheme’s funding on average”.
In her opinion, the sector has focused too much on cost-cutting and simplifying arrangements in recent past years rather than creating a safety net for sharply dropping funding ratios.
She said pension funds should visualise their risk management through a “risk grid”, showing the relationship between funding and the securities in their investment portfolios.
“Make clear what the chances are so that coverage drops within a year by 5 percentage points to less than 95%, and decide how the asset allocation should be adjusted to avoid the pain barrier,” she said.
Veringa said the outlook for risk-bearing investments was “not promising” over the next 18 months, with only credit scoring a plus, and the expectations for government bonds being the worst.
“Currently, AXA is replacing government bonds with credit,” she said.
In her view, Dutch pension funds should review their estimates for future returns and develop scenarios based on long-term low interest rates, “as everything is to change”.
Also speaking at the conference, Canadian pensions expert Keith Ambachtsheer recommended splitting pension funds into an accrual scheme and a benefits plan, which, respectively, should focus on generating returns for active participants and offering security to pensioners.
“The elements of accrual and benefits combined in the current schemes are contradictory, and are the reason why both active participants and pensioners are dissatisfied,” he said.
In Ambachtsheer’s opinion, the accrual scheme should invest predominantly in equity, whereas the payment one should aim at investments that match liabilities, adding that over-50s should gradually move from the accrual fund to the benefits scheme.
Ambachtsheer also said the 70% replacement ratio of the average salary – a common aim of Dutch pension funds – could be lowered, “as several studies in Canada have suggested 50% is often sufficient to continue the desired life style”.
He added: “A much lower target accrual would make pensions much more affordable. Key is finding the percentage that matches a pension fund’s target group.”
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