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Funds blame bulk of decline on interest rates

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NETHERLANDS - Major pension funds have argued up to two-thirds of the decline in their cover ratios, which now hover between 85% and 100%, was because of a steep drop in interest rates.

The Dutch pension fund for civil servants said the declining interest rate in the last two months of 2008 was almost entirely responsible for the fall in the cover ratio, which dropped from 118% to 90% in the forth quarter.

“The drop was caused for almost two thirds by the declining interest rate and around one third by the decline of the fund’s asset,” said ABP.

Peter Borgdorff, managing director of the care and welfare pension fund PFZW, said: “The worldwide economic recession and low long-term interest rates had an impact on the results for the past quarter on our pension fund’s financial position.”

PFZW’s cover ratio decreased from 148% to 92% in 2008, and it attributed 29% of this drop to the combined effect of the return, a fall in interest rates increased pension liabilities and the hedging of the interest-rate risk.

The long-term interest rate dropped from 4.9% at the beginning of 2008 to the historic low level of 3.6% at the end of 2008, leading to an increase in pension liabilities.

ABP argued a drop in interest rates of just 1% increased liabilities by 17%.

If you have any comments you would like to add to this or any other story, contact Carolyn Bandel on +44 (0)20 7261 4622 or email carolyn.bandel@ipe.com

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