NETHERLANDS - The €218bn Dutch public servant fund ABP has warned that continued use of the mandatory discount rate for pension liabilities may hamper recovery of its funding ratio, possibly leading to benefit cuts.

The pensions giant called on lawmakers to "reconsider the mandatory use of the swap rate as discount rate for pension liabilities", a spokesperson for the fund told IPN yesterday.

The scheme's funding ratio stood at 98% as at 31 July.

As a result of exceptionally low long-term interest rates, the ratio of assets to liabilities has since deteriorated.

ABP is set to publish its 31 August funding ratio on 10 September.

According to the pension fund, its dangerously low funding ratio is merely a matter of accounting practices.

A spokesman said: "Our assets are at an all-time high. In addition, our investment are generating good returns,

"We aim to earn returns of 7% this year and are right on schedule. But as a result of historic low interest rates, our funding ratio has declined despite all this."

Under the Dutch supervisory regime (FTK), schemes discount their liabilities at market value based on the swap curve, which has proved to be very volatile and led to 'paper deficits', the spokesman said.

Continued mandatory use of the discount rate threatens to lead to painful cuts for millions of people, he claimed.

ABP serves 2.8m plan participants, and many schemes are facing similar problems.

Pensions supervisor De Nederlandsche Bank (DNB) has resisted revising the current discount rate, arguing that it would be unwise to change the rules of the game midway through the match.

But ABP begs to differ, its spokesman adding: "The question is - when is it 'game over'?"

He said there were various alternative discount rates that still allowed for market valuation, "such as a discount rate that is tailored to specific characteristics of the scheme in question, or an averaged rate to smooth out extreme swings."

On the other hand, he said, ABP did not agree with the harsh criticism of DNB expressed by trustee board chairman Ronald van Vliet of €22bn metalworkers scheme PME.

In the Dutch newspaper Reformed Daily, Van Vliet claimed the supervisor had "forced" pension funds to accept the current discount rate "with knives bared".

The ABP spokesman: "The point is not to lay blame. It's more important to remember that even when the discount rate was first proposed, it was clear extreme situations might crop up and that we agreed even then that it would be wise in that case to reconsider the choice of discount rate."

Earlier this week, director of €90.5bn healthcare fund PFZW Peter Borgdorff also told IPN he believed a serious discussion about the discount rate was in order.

He has said he hopes there will soon be a decision regarding a "new measure" for pension funds to base their policy decisions on - including the decision to cut benefits.
"The market rate is extremely volatile, and consequently, so are funding ratios," he said.

"They provide no more than a momentary snapshot, which is not a solid ground for important long-term decision-making."