Low interest rates and anaemic equity markets have pushed some of the largest Dutch pension funds to the brink of early rights cuts.
As of the end of January, the ‘topical’ coverage ratios at the €355bn civil service scheme ABP, the €165bn healthcare pension fund PFZW and the metal schemes PMT (€61bn) and PME (€40bn) dropped to just over 90%.
However, the fact rates fell further and markets continued to struggle over the first half of February has not yet been factored into funding figures.
At the end of last month, ABP’s coverage ratio stood at 91.2%, PFZW’s 90%, PMT’s 92.2% and PME’s 91.4%.
At the time, ABP and PFZW warned that they might be forced to implement discounts if their financial positions failed to improve, while PME and PME conceded that the prospects of discounts had increased.
Last week, Mercer and Aon Hewitt estimated that Dutch pension funds had lost 3-4 percentage points of coverage on average over the first 10 days of February alone.
The schemes attributed the funding drop primarily to falling interest rates, with PFZW and PMT reporting a decrease in coverage of 6% and 6.6%, respectively, last month.
The civil service scheme ABP – in contrast to PFZW, PMT and PME, which reported a slight increase in assets – said it lost €2bn in January.
“We need to explain the developments thoroughly to our participants,” an ABP spokeswoman said, stressing that the decisive factor in any possible cuts would be the situation at year-end.
“Last year also had a bad start, but the coverage improved over the course of the year,” she added.
At January-end, PFZW’s official ‘policy’ coverage ratio – the 12-month average of the topical funding, and the main criterion for rights cuts and indexation – stood at 97%.
ABP, PME and PME reported policy funding of 98.2%, 98% and 97.2%, respectively.
The new financial assessment framework (nFTK) allows pension funds to smooth out any cuts over a 10-year period if their policy funding falls short of the required minimum of 105%.
However, schemes must start applying a discount immediately if their topical coverage drops below 90% at year-end, as, at this level, they would be unable to achieve funding of 125% within a 10-year period.
Out of the five largest pension funds in the Netherlands, BpfBouw, the €48bn scheme for the building sector, is in the best financial shape.
In January, it saw its topical coverage fall from 108.9% to 104.4%.