ABP has cut pension premiums in an unexpected move. ABP, the largest Dutch pension fund, says its pension costs for members will be lower than last year.
Dick Sluimers, ABP director, says that the pension contribution, in terms of percentage of salary, will fall by 2.2 percentage points to 15.5%. This level is expected to be maintained for the foreseeable future.
The decrease is mainly due to the FTK’s new financial regime, which ABP has already implemented for 2006. The new FTK solvency rules, which become law in January 2007, could also have positive effects on over 700 other Dutch pension funds. The major requirement of these rules is that pension premiums should be cost-effective.
The DNB allows pension funds to use a notional interest rate for their long-term strategic plans. According to Sluimers, ABP has chosen the highest rate allowed by the DNB, a 5% yield on bonds. At the same time, Sluimers expects that ABP will again be fully covered (with a 125.6% coverage ratio) until 2006. The coverage ratio for 2004 is 118.1%.
ABP will not at present be changing its strategic investment mix (44% bonds, 56% equities, commodities, private equity and real estate). However, throughout 2006, a new Strategic Investment Plan (2007-2009) will be developed.
But Sluimers says that indexation at ABP is conditional: the pension fund still sees it as one of its main tasks to regain full indexation in future. From a coverage ratio of 140%, full indexation will be possible.
He said full indexation will be implemented, in combination with a so-called catch-up indexation (the indexation of former years which has not been paid out), before the fund starts reducing premium payments in real terms. This means that although the premiums will stay the same in terms of percentage, in reality subscribers will be paying less. Sluimers indicates that a catch-up indexation of the last three years would mean an additional 1.1% indexation.
For 2006, ABP has decided that indexation will be 0.17%, which is 45% of the average salary development in the public sector (+/- 0.38%).
Dutch pension premiums have more than doubled since 2001 because of stock market losses. In 2005 pension premiums increased by 11%.