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New FTK framework could lead to overfunding, warns Netspar

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The new Dutch financial assessment framework (nFTK) could cause funding ratios to rise too far over the long term, as its rules make it difficult to reduce pension contributions, research by pensions think tank Netspar has suggested.

Researchers Lei Shu, Bertrand Melenberg and Hans Schumacher, of Tilburg University, said their findings raised the question whether the supervisory framework – introduced in 2015 – was as sustainable as it was meant to be.

They assessed several scenarios over a 50-year period, based on a pension fund with the minimum required coverage of 104.3%, an investment mix of 35% equity and 65% fixed income as well as stable contributions.

The researchers found that in 60% of the situations, participants would receive a fully indexed pension after fifty years, with funding exceeding 150% in half of the scenarios.

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In the opinion of Melenberg, a professor of econometrics and finance, the nFTK should prevent such peaks, “as employers would demand a premium reduction, and [politicians] would also like to interfere”.

According to the researchers, coverage could rise as high as predicted as the nFTK only allows for lowering contributions if all indexation in arrears has been granted and the remaining assets are sufficient for future inflation compensation.

They also found that in 40% of the assessed situations, the pension result would be lower than the fully indexed level.

In the 5% of the worst scenarios, future benefits would be no more than 40% of the indexed pension.

They attributed such a result to a combination of stable contributions with situations of high wages inflation and low returns, rather than to the nFTK.

Shu, Melenberg and Schumacher said that they were currently looking at how scenarios with a different investment mix and a lower funding ratio would pan out, adding that they also wanted to compare the nFTK with the previous supervisory framework.

Melenberg, however, said that he did not expect that the result would differ significantly.

He announced that he and his co-researchers would draw up proposals for adjusting the nFTK, including suggestions to reduce contributions once a coverage ratio was high.

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