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Dutch watchdog's rate tinkering 'threatens' sustainability of DB schemes

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The Dutch pensions industry has criticised the regulator’s controversial decision to lower the ultimate forward rate (UFR), part of the discount rate for liabilities, from 4.2% to 3.3%. 

The Dutch Pensions Federation said it was “very disappointed” by the move, with its director, Gerard Riemen, arguing that defined benefit arrangements would “no longer be sustainable” over time, assuming interest rates remained at their current level or similar levels.

PMT, the €65bn pension fund for the Dutch metal industry, said the UFR’s adjustment had reduced its coverage ratio by more than 3 percentage points, to just over 100%.

Director Guus Wouters said the amended rate would also threaten PMT’s five-year pensions contract, designed to increase premium stability at the scheme. 

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The €43bn PME scheme said the new UFR would knock 2.4 percentage points off its coverage ratio, lowering it to 100%, while tacking on a full year to a recovery plan already approaching 10 years.

Director Eric Uijen added: “The measure will further delay indexation and increase the possibility of future rights cuts.”

PME also echoed PMT’s assertion that the new rate would make pensions accrual more expensive. 

Frank Eldersson, director of pensions at the regulator, defended the new rate, claiming it was more balanced and fairer for all generations, and that it accounted for “as much market information as possible”.

The UFR will be based on a 10-year running average of the 20-year forward rate.

That average currently stands at 3.3%, but it is expected to fall over the next few years.

Eldersson said the new UFR stood to reduce coverage ratios by 6 percentage points at pension funds with predominantly younger participants but just 3 percentage points for average funds and 2 percentage points for funds with older participants.

The Pensions Federation, however, predicted that, if the UFR remained at its end-of-May level, it would cut funding by 15% on average – from 7% for younger schemes to 23% for older ones – by 2020. 

It also argued that the new rate would increase pension funds’ susceptibility to rate changes, and risk destabilising the new financial assessment framework (nFTK).

The Federation said the regulator’s decision to opt for a more market-based rate, “just when the European Central Bank’s quantitative easing programme is strongly affecting interest levels”, made little sense. 

The regulator acknowledged that the new rate could affect contributions next year, predicting an increase in cost-covering premiums of 4-5%, if calculated using current interest rates.

It said it expected the impact on contributions, using expected returns, to be half as big.

The Pensions Federation added that it feared annual pensions accrual would be squeezed where pension funds had capped the premium level.

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