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Discount rate remains stumbling block for Dutch pensions package

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NETHERLANDS - The Dutch pensions sector has broadly welcomed the so-called 'September package' from the outgoing Cabinet as part of a review of the pensions system, but several stakeholders have expressed dissatisfaction with the proposed new discount rate for liabilities.

The Pensions Federation, for example, questioned replacing the three-month average of the "volatile" forward curve with the 'ultimate forward rate' (UFR), saying the UFR was still not a credible valuation of liabilities.

It also called for further talks on determining the best indicator of pension funds' financial health.

The federation acknowledged that rights cuts were inevitable given the current financial situation, but it said it was positive underfunded schemes would now have the ability to limit cuts to 7% a year.

Following the measures, unveiled earlier this week, require cuts at Dutch schemes decreased from 4.9% to 0.8% of combined pension liabilities, according to the regulator (DNB).

The DNB also said the number of pension funds that had to make cuts had dropped from 154 to 97.

The Pensions Federation welcomed the announced easing of the DNB's directive that pension premiums at underfunded schemes must contribute to recovery.

However, it stressed that it "fundamentally disagreed" with the directive for putting the financial burden disproportionally on active and younger participants.

Meanwhile, the €261bn civil service scheme ABP said it was disappointed by the Cabinet's proposals, arguing that they would lift its coverage ratio by just 2 percentage points to 94%.

According to spokeswoman Jos van Dijk, ABP is anticipating cuts of at least 4% in 2014, in addition to the previously announced discount of 0.5% in 2013.

But the €119bn healthcare scheme PFZW said it was satisfied with the September package, describing the measures as "balanced for the long term".

It added: "If the interest rates remain stable or even rise, we might be able to limit cuts to a minimum, or even avoid a discount at all."

In the opinion of Theo Kocken, director of Cardano Risk Management, the chosen UFR is effective because it takes all market rates between 20 and 60 years - with a decreasing weighting - into account.

"Because the weighting of the UFR is gradually increased, it prevents strong market distortion, as well as unnecessary yearly costs," he said.

According to the KNVG, the new lobbying organisation for pensioners associations, the proposed discount rate is both "insufficient and inefficient" and will still lead to considerable rights cuts.

It reiterated its call for an independent experts committee to look into a "comprehensive and sustainable" discount rate.

The Netherlands Bureau for Economic Policy Analysis (CPB) concluded that the combined proposals would lead to a 2% advantage for older participants, equating with increased pension promises of approximately €3,000, or a net monthly benefit of €10.

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