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Dutch regulator lowers ultimate forward rate to 'more realistic' level

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The Dutch regulator (DNB) has adjusted the ultimate forward rate (UFR) – used by local pension funds as a discount rate for liabilities since 2012 – from 4.2% to the more “realistic” level of 3.3%. 

The regulator said the move was unlikely to cause any further pension rights discounts.

It conceded, however, that coverage ratios were set to drop “slightly” and that roughly a dozen schemes would have to submit recovery plans. 

The regulator also acknowledged that the drop in the UFR could lead to contribution increases but said this would depend on the way schemes had set up their premiums, as well as on current contribution levels. 

With the adjustment, DNB follows the recommendations of a committee of Dutch experts commissioned by Jetta Klijnsma, state secretary for Social Affairs.

Although the UFR committee published its findings in October 2013, the regulator called for its implementation to be postponed, pending the conclusion of Solvency II rules for insurers.

It said the new UFR would better reflect market-rate developments and therefore ensure a more balanced approach for older and younger participants.

“A too high discount rate,” it said, “would mean too generous pension benefits and too low contributions – and their effects being transferred to the future.”

The UFR was meant to cushion pension funds and their participants against overly stringent measures as a response to financial market shocks.

The initial discount rate was based fully on market rates.

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