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New longevity model could entail 2% provision increase, Hewitt warns

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NETHERLANDS - The average Dutch pension fund will have to make an additional 2% financial provision if the Actuarial Society (AG) endorses a new longevity model currently in development, Hewitt Associates has warned.

The consultancy based its estimate on a presentation of the new model by one of the AG's designers during a seminar offered by training institute IIR.

However, Robert de Vries, senior worker of quality care at the AG, said external experts were currently vetting the model after the AG's internal pension committee questioned its robustness.

He added: "It is still possible the new model won't be accepted by the AG."

According to De Vries, the discussed model focuses on the longevity prognosis for both the long and the short term, adding that an additional study looks into its predictions for the short term.

"But the AG is determined to present an actuarial advice before the end of August," he said.

Most Dutch pension funds, in anticipation of new AG calculations, have already increased their liabilities by 4.5% for increased longevity, based on figures from Statistics Netherlands.

Arnold Jager, a consultant at Hewitt, said: "An additional provision will mean pension funds' coverage ratio will decrease further, after the considerable decline during the past months."

He said the present regulations stipulated that the question of whether pension funds' recovery plans were on course, or whether possible cuts in pension rights needed to be made, had to be assessed no later than 1 January 2012.

At the end of May, Hewitt estimated that the coverage ratio of most Dutch pension funds had fallen to 102%, largely due to dropping long-term interest rates.

At the same time, Mercer's principal Dennis van Ek estimated that the average funding had fallen to between 95% and 100%.

The minimum required coverage ratio for Dutch pension funds is 105%.

Jager said: "If the new longevity tables are endorsed by the AG, pension funds should look into other actuarial standards, such as age corrections and partner frequencies, for the valuation of the accrued partner pension."
 

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