Dutch pension funds' coverage jumps to 102% using UFR, says Aon Hewitt

NETHERLANDS - Dutch pension funds’ average coverage ratios, according to Aon Hewitt, would have improved to about 102% in September when using the ‘ultimate forward rate’ (UFR), the new discount rate for liabilities.

Presenting the figures for September, Raymond de Kuiper, director of risk and financial management consultancy, conceded that the indicated funding under the UFR was merely an estimate, as the pensions regulator (DNB) was to publish the exact accounting method later this week.

But he estimated that Dutch schemes’ coverage ratios had increased by 2 percentage points to 97% under the current discount rate, the three-month average of the forward curve.

The ministry of social affairs introduced the UFR at the end of last month, as a transitional measure ahead of a new financial assessment framework (FTK), which is to come into force in 2014. At the time, it estimated the UFR to reflect a rate of 4.2%.

The UFR replaces the forward curve, which caused significant volatility in coverage ratios; the DNB allowed pension funds to apply the three-month average of the forward curve for this reason.

The ministry indicated that a new working group would look into the option of making the UFR a structural part of the new FTK.

Aon Hewitt attributed the recent improvement in pension funds’ financial situation to a slight increase in swap rates and improving equity markets.

Pension funds must have reached the minimum required coverage ratio of 105% on 1 April 2013.

For its part, Mercer said it expected the UFR to add 3-4 percentage points to the coverage ratio of the average pension fund, taking the funding up to between 101% and 102%.

Mercer saw the funding of the average scheme rise from 97% to 98.1% based on the three-month average of the forward curve last month, according to actuary Pim van Diepen.

He also underlined that the exact UFR would depend on the fine-tuning for duration and extrapolation to be prescribed by the DNB.