ABP raises premiums again after cover ratio falls to 96%
NETHERLANDS - The €220bn civil service scheme ABP has again decided to raise its contributions temporarily by 1% to compensate for the drop of its cover ratio to 96%.
The premium increase - to 21.3% of the pensionable salary - will take effect on 1 August and remain in place until the required funding ratio of 105% has been reached, according to the pension fund.
The measure follows ABP's recovery plan, which aims at a funding of 105% at the end of 2013.
It expects to have rebuilt its required financial reserves - equating to a cover ratio of 125% - by 2022.
The civil service scheme raised its contribution temporarily by 3% for recovery reasons over the last six months of 2009 after its cover ratio fell to 89.5% at the end of 2008.
However, the pension fund terminated the measure at 1 January 2010 because it was ahead of its mapped-out recovery.
After its cover ratio hovered between 105% and 100% during the first months this year, it dropped to 96% in May.
ABP attributed the drop to low long-term interest rates, which have to be applied for accounting its liabilities.
According to Jos van Dijk, spokeswoman for ABP, the pension fund has only hedged about 25% of the interest risk on its liabilities.
"As we are an investor for the long term, we don't want to base our policy on present-day interest rates," she said.
"Moreover, a full hedge of the interest risk means it will be more difficult to grant indexation in case of a strong rise of inflation."
According to Arnold Jager of consultant Hewitt Associates, a 1% drop in long-term interest rates increases pension funds' liabilities by 16%.
That said, Jager noted long-term interest rates had increased by 0.5 percentage points in June and now stood at 3.4% and 3.3% for 15-year and 30-year loans, respectively.