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Japan disaster drags down Dutch coverage ratios, say consultants

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  • Japan disaster drags down Dutch coverage ratios, say consultants

NETHERLANDS - The coverage ratio of the average Dutch pension fund has decreased by at least 1.5 percentage points, following developments in Japan, the consultants Aon Hewitt and Mercer have confirmed.

The drop comes shortly after regulator De Nederlandsche Bank confirmed that coverage ratios had risen by eight percentage points to the end of 2010.

Arnold Jager of Aon Hewitt said: "Since Monday, equity markets started dropping, followed by long-term interest rates, which decreased by 10 to 15 basis points to 3.5% and 3.9% for ten and twenty years respectively."

That said, the consultant conceded the 20 basis point rise in interest rates so far this year, still exceeded the recent decline.

In Jager's opinion, the developments have taken approximately 3% off the funding ratio of the average scheme, which is now slightly below the required minimum of 105%.

Dennis van Ek, principal at Mercer, is more optimistic and estimated the lost coverage at 1.5 percentage points.

"Worldwide, the markets have decreased by 4%, and the following flight for AAA government bonds and swaps caused the interest rates to drop 10 basis points, leading to a funding fall of 2% for the average pension fund with a 35% equity allocation and a 50% interest hedge," said the consultant.

"However, meanwhile the interest rates have recovered to the pre-disaster level, eliminating its initial impact on the liabilities of pension funds," noted Van Ek.

The €3bn pension fund for the care insurance sector (SBZ) reported a coverage ratio drop of four percentage points over last week, attributing the decrease to both the problems in Japan and in the Middle East.

"The equity markets decreased 5% globally, and the flight from equity to bonds and cash pushed the long-term interest rates down," commented Peter van Gemst, the scheme's chief investment officer.

Dutch pension funds must account their liabilities against the long-term interest rates.

However, in the opinion of Van Gemst, the decreasing equity markets were the main contributor to the dropped funding of his pension fund, which has hedged two-thirds of the interest risk of its liabilities.

SBZ has allocated 30% of its assets to equity and has invested 50% in fixed income.

The €99bn healthcare scheme PFZW and the €22bn metal scheme PME declined to indicate any developments of their funding ratio last week, and said they want to stick to their monthly reporting.
 

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