New FTK to boost funding at Dutch schemes, consultancies predict
Dutch pension funds’ average funding would increase by 2 percentage points as a result of the introduction of a new accounting mechanism for the coverage ratio, according to pensions advisers Mercer and Aon Hewitt.
Both consultants looked at the effect of the introduction of the 12-month average of the coverage ratio – instead of the three-month average of interest rates – as part of the new financial assessment framework (FTK), which is to go into effect on 1 January.
Mercer estimated that the average coverage ratio had increased by 1 percentage point to 110% in November, the same level reported at the end of 2013.
In its monthly monitoring report, it estimated that, if interest rates and investment markets remained level, the average funding would fall by 2 percentage points to 108% in December.
According to Aon Hewitt, average funding at the end of November was 109%.
Dennis van Ek, an actuary at Mercer, said the new ultimate forward rate, which will also go into effect on 1 January, will come at the expense of 1 percentage point of the average coverage.
He added that the expected average funding under the new rules would be 109% at the end of 2014.
The coverage is expected to drop to 107% over the course of 2015, following the gradual decrease of the 12-month average effect, Van Ek said.
Aon Hewitt estimated that the average coverage at year-end would be between 109% and 110%, if the new FTK rules were applied.
However, the consultancy forecast that, if both interest rates and investment markets did not change, the funding would gradually decrease to 102% over 2015.
Aon Hewitt based its calculations for the average coverage ratio on an investment mix of 54% fixed income, 32% equity, 8% property, 2% hedge funds and 4% liquid assets.
Mercer derived its figures from the latest statistics from pensions supervisor De Nederlandsche Bank (DNB) on average funding, as well as asset allocation.
It also factored in an average interest hedge of 37% and a currency hedge of 50%.
Mercer further noted that the 30-year swap rate had dropped from 2.73% to an absolute low of 1.61% over the course of 2014.
As a consequence, pension funds’ liabilities have jumped by approximately 15%.
However, Van Ek pointed out that excellent returns on investments had largely offset this rise in liabilities.
He added that, based on the current market rates, the funding of Dutch pension funds would be 106% on average at present.