Dutch scheme attributes woeful coverage ratio to age of participants
NETHERLANDS – The €49m pension fund of Royal Leerdam has attributed its dire financial position – a coverage ratio of 84.7% – mainly to its young population.
Richard van Maanen, secretary at the scheme, told IPE: "In 2003, our pension fund became independent, with a funding of 105%, and an entire population of active participants.
"As a consequence, the duration of our liabilities is extremely long, and the rising life expectancy has hit us hard, equating to no less than 11 percentage points of our coverage ratio."
With its funding of 84.7%, the glass manufacturer's small scheme came lowest on the Pensions Federation's list of 51 of the 68 Dutch pension funds that must apply rights cuts.
Royal Leerdam is to cut its pensions by 7% this year and is anticipating an equal discount in 2014.
In April last year, the scheme cut pension rights by 5.7% after its coverage ratio dropped to 77.8% at the end of 2011.
"Following the large proportion of active participants, our duration is over 22 years, which makes us very susceptible to developments of long-term interest rates," Van Maanen said.
"When the interest rates nose-dived, we just had increased the hedge on the interest risk of our liabilities to 50%. By then, our coverage – which had been 117% at the start of the financial crisis – had already dropped to less than 100%.
"Had we had a full interest hedge at the first dip of the interest rates, our current funding would have been approximately 90%."
Van Maanen also argued that an increased hedge would have been expensive and come at the expense of the scheme's recovery potential.
"It's easy to say things with the knowledge of hindsight," he said. "The board has taken the right decisions based on the information it had back then."
Among the recovery measures the scheme has taken is an increase of the pensions contribution to the current 26.2% of the pensionable salary in 2011 and 2012.
In order to be allowed to spread additional cuts over 2014 and 2015, the board has also decreased the yearly accrual rate from 2.1% to 1.85%.
In addition, the scheme has replaced its initial accrual-based surviving relatives pension with a risk-based one.
Despite the pension fund's position, Van Maanen said it preferred to remain independent for the time being.
"After looking at all the options in the market, we have concluded the cuts are inevitable," he said. "We just must face them."
Van Maanen added that the board had no desire to place the pensions with an insurer.
"Apart from the inevitable discount, we would also give up future indexation," he said.
"As a small scheme, we must be able to perform well, if we can keep our costs under control."
The Stichting Pensioenfonds Royal Leerdam has approximately 500 participants in total, of which 325 are active.
During 2012, it returned 11.9% on investments.