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IPE special report May 2018

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Average coverage ratio at Dutch pension fund jumps to 110%

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Dutch pension funds’ coverage ratios have improved to 110% on average over the month of October, according to pensions advisers Mercer and Aon Hewitt.

Mercer estimated that funding increased by as much as 2-3 percentage points over the month.

Dennis van Ek, actuary and principal at the consultancy, said: “Following the averaging effect of the forward rate of the previous three months, the discount rate has risen 8 basis points.

“As a result, pension funds’ liabilities decreased by 1.25% on average, while their funding rose by an equal percentage.

“In addition, a 4% return on equity further pushed up the coverage of the average pension fund by another 1-1.5%.”

Van Ek further noted that market rates, on balance, had remained stable in October.

According to Mercer, the three-month average of the forward curve now exceeds the current market rate by 6bps.

“If the market rates are to remain stable,” said Van Ek, “the legal discount rate will decrease, leading to a reduction of the average funding of approximately 0.5%.”

Aon Hewitt, which reported an average funding of 107% at September-end, found an increase of 3 percentage points in October and concluded that the average coverage ratio of 110% was now at its highest since January 2012.

However, it predicted a funding decrease of 0.6% if long-term interest rates remain unchanged in the coming months.

The required minimum funding for pension funds is 104.3%, and schemes with a lower coverage ratio at year-end will need to take corrective measures, such as rights cuts.

According to Aon Hewitt, pension funds’ assets increased by 1.7% on average over last month.

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