Dijsselbloem to lead Dutch committee on discount rate
Former Eurogroup president Jeroen Dijsselbloem has been appointed to lead a committee looking into investment parameters and the discount rate for Dutch pension funds, the Dutch ministry for social affairs has announced.
Dijsselbloem is a former Dutch finance minister and was chairman of the European Stability Mechanism until January last year.
The committee is appointed to advice the Dutch government every five years about assumptions for returns that pension funds are allowed to use when setting their contribution rates.
Its recommendations also include the discount rate for liabilities, an important factor in calculating pension funds’ coverage ratios.
The committee’s appointment comes at a crucial period, as the large metal industry schemes PMT and PME have warned that they will need to apply cuts to pension payments from next year if their funding levels – currently 102.3% and 101.3%, respectively – do not improve to at least 104.3% by the end of this year.
The general expectation in the pensions sector is that the parameters committee will conclude that pension funds must lower their assumptions for future returns.
Since 2015, pension funds have been allowed to use a return expectation of 7% a year for listed equities and 2.5% a year for AAA-rated government bonds. Assumptions for other securities and listed property were set at 7.5% and 6%, respectively.
Last week, the €399bn civil service scheme ABP announced that it would cut its forecast for overall returns for the next 10-15 years to 5% a year, after generating 6% on average during the past five years.
Reducing parameters could lead to higher contributions or reduced pensions and could also have an impact on pension funds’ recovery plans.
Discount rate debate
The discount rate for liabilities – the market rate plus the application of the ultimate forward rate (UFR), based on a 10-year average – has been the subject of discussion for years in the Netherlands.
Much of the pensions sector, trade unions and pensioners have argued that the discount rate has unnecessarily kept pension funds’ funding levels too low, while economists and risk experts have contended that raising the discount rate would come at the expense of pensions for younger participants.
The committee will be specifically tasked with assessing whether the UFR properly reflects the risk-free interest rate for longer durations.
The UFR is currently 2.3%, but is expected to drop to 2.2% in July and approximately 2% next year. When the UFR was introduced in 2015, the rate stood at 3.3%.
The largest trade union FNV, has advocated adopting the European UFR for insurers – set by European supervisor EIOPA – which is expected to decrease from 4.05% last year to 3.6% in 2021.
Social affairs minister Wouter Koolmees, with the support of supervisor De Nederlandsche Bank, has so far rejected raising the discount rate.
The committee also includes pension experts Marike Knoef, Bas Werker, Onno Steenbeek, Casper van Ewijk, Anja de Waegenaere and Albert van der Horst.