Dutch civil service scheme ABP has seen its funding ratio exceed 100% for the first time in two years. The 7 percentage point rise in the first quarter of 2021 was mainly due to an increase in interest rates over the quarter, which resulted in a €33bn drop in liabilities.

ABP has hedged only about 20% of its interest rate risk, much less than most other Dutch pension funds. The €499bn pension fund has therefore also benefited disproportionally from the recent rise in interest rates as it saw its funding ratio rise to 100.5%.

Other large sector schemes such as PMT and PME, which have hedged a much larger proportion of their interest rate risk and invest more in government bonds, saw their funding ratios rise by much less.

PMT, however, saw its funding ratio rise above 100% once again as well. The increase to 101.7% came despite a negative investment return of -3% and the introduction of a new, lower ultimate forward rate (UFR) curve as of this year.

The new UFR curve, which is being introduced gradually over a three-year period, is expected to lead to a 5% drop of the funding ratio of an average pension fund by 2024, according to experts.

ABP was the only of the five largest Dutch pension funds that saw a positive return on its investments during the first quarter. The negative returns on the fund’s matching portfolio were more than offset by strong returns in equities, real estate and alternatives.

ABP’s commodities portfolio did especially well, returning 17.6% or €4.3bn over the quarter.

Chance of pension cuts remains

ABP’s president Corien Wortmann–Kool welcomed the improved financial position of the fund, but warned that economic prospects remain uncertain.

“As a result, there will unfortunately not be much change in the prospect for our members. There’s no perspective to index pensions and the chance of pension cuts over the coming years remains real,” she said.

Earlier this year Wortmann–Kool 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-based pension system.

In other positive news, ABP adjusted its return on private equity for 2020 upwards from 14.8% to 21%, meaning the return was €600m higher than previously thought.

“As a result of positive developments in the private equity portfolio during the fourth quarter of 2020, we have adjusted the annual return figures,” a spokesperson commented.

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