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Rights cuts already possible in 2017, warn PFZW, ABP

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Dutch pension savers might face rights cuts as early as next year If the current headwind of low interest and ailing equity markets continues, two of the largest pension funds in the Netherlands have warned. 

While presenting the preliminary returns for 2015, Peter Borgdorff, director of the €164bn healthcare scheme PFZW, warned that the participants could face a rights cuts in 2017.

However, was at pains to emphasise that any cuts could be smoothed out over a 10-year period.

Corien Wortmann-Kool, chair of the €351bn civil service scheme ABP echoed Borgdorff’s warning. “The chances haves increased that cuts are necessary next year,” she said as the civil service scheme, Europe’s largest pension fund, published its preliminary results for 2015.

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PFZW and ABP saw their official policy coverage ratio – the 12-month average of the topical funding, used as the criterion for granting indexation and administering rights cuts – drop to 97% and 98.7%, respectively, at year-end.

However, the dramatic decline seen across equity markets since mid-January has yet to be factored into the coverage ratios.

At the time, the consultancies Mercer and Aon Hewitt concluded that the market decline would  reduce average Dutch coverage ratios by approximately 4 percentage points.

“Were the topical funding to stand at 87% at the end of this year, we would have to start discounting pension rights straightaway,” said Borgdorff.

He added that PFZW’s recovery plan was aimed at meeting the required funding level of 126.6% in ten years’ time, and that the mapped out improvement was based on the maximum allowed assumptions for returns, equating to an annual result of 6%.

“However, [from] a funding of 87%, we won’t be able to meet our target,” he noted. PFZW fell well short of the 6% target in 2015, only achieving an overall return of -0.1%.

The announcement of possible rights cuts next year came as a surprise, as it had been widely expected within the pensions sector that discounts would not be on the cards soon.

In order to prevent shocks, the new financial assessment framework (nFTK) allowed the postponing cuts for five years, in case pension funds’ coverage fell short of the required minimum funding of 105%.

With 98.5% and 97.7% respectively at year-end, the policy funding of the large metal sector funds PMT and PME stood at a similar level as ABP’s and PFZW’s coverage.

Jan Berghuis, chairman of the €60bn PMT, noted that the planned recovery had been “delayed and the possibility of rights discounts had come closer”.

Eric Uijen, director of the €40bn PME, cited “dark clouds”, and echoed Berghuis’ forecast that the lack of improvement had increased the likelihood of cuts.

Following the recent decline in the financial markets, the topical funding of both metal schemes has dropped roughly 4 percentage points, and has brought them closer to the funding level of 90% that would trigger rights cuts.

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