The Netherlands’ largest pension fund ABP has called for a change in the way pension schemes’ funding ratios are being calculated in order to prevent having to cut pensions in the run-up to the transition to a new defined contribution (DC)-based pension system.

The president of the €493bn civil service scheme’s board of trustees, Corien Wortmann, said she wants the actuarial interest rate that is being used to calculate pension liabilities to reflect expected investment returns.

In practice, this would mean the actuarial interest rate would rise, resulting in a significant improvement in funding ratios.

Wortmann called for Social Affairs Minister Wouter Koolmees to quickly introduce new rules for the transition phase “in the spirit of the new pensions contract”. She added: “The minister has promised that he will do so, and he needs to speed up the process so we can give clarity to our members.”

In an effort to prevent “unnecessary pension cuts”, Koolmees already relaxed the minimum funding ratio requirement for pension funds to 90% during the transition phase to the new DC-based pension system.

And according to the draft pension law that was published last month, a funding ratio of 95%, rather than 100%, would suffice to make the transition by 2026.

But according to Wortmann, the expectation of Koolmees that, under these new rules, ‘an average pension fund’ will not have to cut pensions until 2026 in the run-up to the transition to a DC-based pension system is too optimistic.

ABP and PFZW narrowly managed to prevent having to cut pensions this year, thanks to solid returns on their investments in the fourth quarter of 2020. But the threat of cuts is still looming, not least because of the introduction of the staggered establishment of a new, lower ultimate forward rate curve until 2024.

This will push down the funding ratio of an average Dutch pension fund by some 5 percentage points.

“We – and the other large pension funds too – do not recognise the optimistic picture minister Koolmees is painting, when he says the average pension fund will not have to cut pension in the coming years,” Wortmann said.

Director Joanne Kellermann of the country’s second-largest pension fund PFZW agreed with Wortmann, saying pension cuts “are almost impossible to prevent if conditions do not change.”

Terry Troost, president of the scheme for workers in the metals industry, was also critical of the minister. “He paints the picture of a seamless transition to the new pension system. But I see something different: that it’s very realistic we will have to cut pensions in the coming years,” he told the daily Algemeen Dagblad on Wednesday.

The director of the other metals industry scheme PME, Eric Uijen, called for ‘honest expectation management’ by politicians.

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