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Dutch cabinet decides against extending recovery term for pension funds

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The Dutch government has said it would refrain from extending the current 10-year recovery term for pension funds, as only a limited number of schemes need to cut pension rights, following the significantly improved economic situation.

In a letter to the Dutch parliament, Jetta Klijnsma, state secretary for social affairs, said that rising interest rates and recovering equity markets during the last two months of 2016 had pushed pension funds’ coverage up to 102% on average.

As a consequence, supervisor De Nederlandsche Bank (DNB) has concluded that no more than five schemes have to apply rights discounts of less than 1%, according to the state secretary.

She added that DNB hadn’t factored in the possibility of a premium increase or additional contribution by an employer that could stave off cuts.

Earlier this year consultancies Mercer and Aon Hewitt predicted that no more than 10 pension funds in the Netherlands would have to apply rights discounts this year given improvements in some market conditions.

The coverage ratio of pension funds showed considerable volatility last year, with falling interest rates – the main criterion for discounting liabilities – in particular triggering a funding drop of 8 percentage points on average in the first quarter.

Based on this situation, which hadn’t changed at the end of the third quarter, more than two million participants and pensioners were facing rights cuts.

The new financial assessment framework (nFTK) allows for the recovery term to be extended in case of extraordinary economic circumstances that would cause a large number of pension funds to fall short of their obligations.

Klijnsma, however, noted that approximately 85% of the 290 pension funds still have a funding shortfall, and that full indexation is only allowed if their coverage exceeds 120%.

She added that the risk remains that schemes must cut pension rights unconditionally, if their funding stays below the required minimum level of 104.2% during five consecutive years.

In other news, the Dutch cabinet said it opposed raising the discount rate for liabilities, as this would benefit older workers and pensioners at the expense of future generations.

It drew its conclusion from a study by the Netherlands’ Bureau for Economic Policy Analysis (CPB), which confirmed that a high discount rate would enable pension funds to grant indexation soon.

Future generations, however, would receive up to 30% lower pensions as a consequence, according to the CPB.

At the moment, the discount rate, set by DNB, varies from 1.12% for pension funds with a predominanly old population to 1.52% for schemes with mostly young participants. The discount rate includes an ultimate forward rate of 2.9%.

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