Mercer, Aon Hewitt blame QE for Dutch schemes' funding woes

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Mercer and Aon Hewitt have suggested the European Central Bank’s (ECB) programme for monetary easing through the large-scale purchase of government bonds is to blame for Dutch pension schemes’ funding decreases in March. 

Both consultancies estimated that the coverage ratio of Dutch pension funds fell to 104% on average over the month, with Aon Hewitt reporting a 2-percentage-point drop.

Dutch schemes’ ‘policy funding’, based on the 12-month average of current coverage, fell to 108% on average.

Aon Hewitt noted that current funding had fallen below the required minimum of 105% and attributed the decrease largely to the ECB’s quantitative easing (QE) programme.

It said the drop of interest rates in March increased Dutch pension funds’ liabilities by 7.1% in March.

Mercer concluded that, on balance, the coverage ratio had fallen by 3 percentage points since the ECB initiated QE on 9 March.

The consultancy pointed out that the 30-year swap rate had dropped 46 basis points to 0.8% over this period, causing liabilities to increase by 6.3% for the average pension fund.

However, this was, in part, offset by returns as a result of the interest hedge on liabilities, it added.

For the first quarter, Mercer said the 30-year swap rate had decreased from 1.46% to 0.8%, leading to a 9% increase in liabilities.

However, the negative impact of this was mitigated by a combination of interest hedges, rising equity markets and a drop in the euro relative to other main currencies.

This was a benefit to pension funds with no currency hedges, or limited ones, according to Dennis van Ek, actuary at Mercer.

He attributed the drop in policy funding to the relatively high coverage of the first quarter of 2014, which is gradually disappearing from the 12-month average and being replaced by the relatively lower funding of the past three months.

Aon Hewitt estimated that policy coverage – now the criterion for indexation and rights cuts – dropped by 1 percentage point in March to 108%.

This is 2 percentage points short of the level where pension funds can start granting inflation compensation.

Frank Driessen, chief commercial officer for retirement and financial management at Aon Hewitt, concluded that the prospects for indexation would decline further in the coming years.

“As the current coverage ratio has been lower than the policy funding for quite a while, the latter is to decrease further,” he said.

“As a consequence of the low interest rates, many pension funds must submit a recovery plan with supervisor DNB before 1 June.” 

Mercer’s Van Ek also noted that the current coverage without the application of the ultimate forward rate (UFR) was 95%.

This is equal to the average funding at the start of the financial crisis in 2008, when pension funds had no obligation to use the UFR for discounting liabilities.

Earlier in that year, before equity markets collapsed, Dutch schemes’ funding stood at 144% on average.

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