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Dutch pension funds' coverage ratios set to drop further, regulator warns

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Dutch pension funds’ ‘policy’ coverage ratio, based on the 12-month average, dropped by 1 percentage point to 109% over the first two months of 2015 due to the effects of falling interest rates, according to regulator De Nederlandsche Bank (DNB). 

Because current interest rates are 4 percentage points lower, the regulator warned that the policy coverage ratio was set to fall even further in the coming months.

With the introduction of the new financial assessment framework (nFTK), as of 1 January, pension funds must report their coverage using the average funding for the 12 months previous instead of the three-month average.

This so-called policy funding is to serve as the new criterion for indexation and rights cuts.

According to the regulator, funding on a daily basis fell from 108% to 105% on average during the January-February period.

However, figures from Aon Hewitt suggested the actual funding dropped further to 101% on average over March, and that the policy funding had not changed over this period.

During the first two months, the 30-year interest rate fell 46 basis points to 1.64%, and the impact of this decrease largely offset the positive effect of the 5% increase in the MSCI World Index.

The Dutch pensions sector has put increasing pressure on the government to ease some of the nFTK’s new rules, in light of persistently low interest rates, on which coverage ratios are based.

The Pensions Federation recently indicated that it agreed with the €40bn metal scheme PME’s opinion that the government and DNB should start discussions with the pensions sector on how to deal with the extremely low interest rate environment.

Marcel Andringa, trustee and CIO at PME, said pension funds needed more leeway on either their options for raising their risk profile for investments, or on the discount rate for liabilities.

Before then, the largest union FVN warned the government that low rates were becoming a “millstone” around pension funds’ neck.

However, last week, the regulator responded by saying it did not see the need for accommodating struggling pension funds for the short term, “as the current rules are working well”.

It said it also wanted to prevent pension funds from “gambling for resurrection”, according to Olaf Sleijpen, supervisory director at DNB.

In the opinion of the supervisor, problems caused by low interest rates in the long term need to be addressed through a fundamental update of the pensions system.

Sleijpen added that low interest rates hurt less in a system with more defined contribution elements – and without a pensions promise.

Readers' comments (1)

  • Demographics, specifically the unrelenting aging of developed economies, makes DB plans increasingly unstable in the short run and unsustainable long term. Unfortunately in many jurisdictions like North America, these pensions are the last stand for unions. This is not a wise position for employee or the employer because it delays until a crisis the moment of change. DB plans will become target benefit plans out of need rather than by design but the bargaining power of unions will be diminished if they wait.

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