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Low interest rates drag Dutch schemes back into underfunded positions

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Persistently low interest rates have created funding shortfalls at some of the Netherlands’ largest pension funds, with liabilities overtaking returns on investment at ABP, PME and PMT over the third quarter.

ABP, the €334bn pension fund for civil servants – which reported a 2.9% Q3 return – saw its coverage ratio drop by 3.6 percentage points to 103.1%, which is 1.1 percentage points short of the required minimum.

PFZW, the €156bn healthcare scheme, only just managed to avoid an underfunded position, with its coverage ratio falling by 5 percentage points to 105%.

The funding ratio at Bpf Bouw, the €45bn pension fund for the building industry, fell by 2.9 percentage points over the period, closing out the quarter with a coverage of 113.8%, the highest of the five largest schemes.

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Dutch schemes with funding shortfalls will not be forced to apply rights cuts next year, due to the implementation of the new financial assessment framework (FTK).

But José Meijer, vice-chair at ABP, said her scheme’s financial position was “alarming anyway” in light of “extremely” low interest rates, the criterion for discounting liabilities.

Excepting its commodity holdings, which lost 4.9% over the period, ABP reported positive returns for almost all asset classes.

Private equity and hedge funds – returning 9.8% and 9.6%, respectively – were the best-performing asset classes, while the fixed income portfolio returned 3.9%, with credit and emerging market debt returning 4.8% and 3.8%.

Developed and emerging market equities returned 5% and 4.3%, respectively, while property and infrastructure returned 4.4% and 6.9%.

ABP’s interest and currency-risk hedges led to a 1.4% loss.

The €38bn metal scheme PME said its funding fell to 102.6%, despite a quarterly return of 4%, and because the discount rate fell by 31 basis points to 2.14% over the period, liabilities increased by 6.6%.

Frans Willem Briët, the pension fund’s chairman, said the forecast for the fourth quarter was equally gloomy, and that the prospect of granting indexation next year was grim.

In his opinion, the scheme’s participants are “paying the price for interest rates being kept low in Europe”.

He also pointed out that PME, due to its low-risk profile – with 59% fixed income and 34% equity allocations – was struggling to benefit from recovering markets.

The €55bn metal scheme PMT closed the third quarter with a funding of 102.8%, despite a return on investments of 4.6%.

The pension fund said it had been particularly vulnerable to low interest rates due to the relatively young age of its participants.

PMT reported returns of 2.9% and 5.2%, respectively, on equity and fixed income, and generated 3.5% on its property holdings, while alternatives returned 8%.

PFZW’s entire investment portfolio returned 2.8%, of which 2.1 percentage points were attributable to its interest and currency hedge.

The healthcare scheme said it has returned 12.1% over the last three quarters.

Private equity, hedge funds and infrastructure returned 4.3%, 2.2% and 3.8%, respectively, while equity and property returned 1.3% and 0.4%.

Government bonds, returning 4.3%, were the best-performing segment of PFZW’s fixed income portfolio.

By contrast, the pension fund lost 12.1% on its commodities investments, due to falling oil prices.

BpfBouw reported a quarterly return of 4.5%, mainly due to the appreciation of its bonds holdings, as well as the effectiveness of its interest hedge.

However, that return was largely offset by a 6.6% increase in liabilities.

Bouw said its coverage ratio was likely to continue to fall for the time being, due to persistently low interest rates.

The building-sector scheme said its holdings in equity, fixed income and property generated quarterly returns of 5%, 3.6% and 2.2%, respectively.

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