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DNB find schemes "too liberal" in assumptions

NETHERLANDS - "A number" of pension funds are too liberal in the expected returns assumptions used as a basis for establishing costs covering contributions, according to pension regulator De Nederlandsche Bank (DNB).

Although it is up to schemes how they calculate - within the legal limits - their expected returns, many apply the maximum allowed while some are even exceeding the limit, DNB said in its third-quarter report.

As a result, the latter category of pension funds is being approached by DNB for a correction to their too-optimistic forecasts, spokesman Herman Schipholt told IPE.

Besides the indexation option - which allows pension funds to state how much of the scheme's returns will be used to counter inflation - the contributions policy is also an important control instrument of pension funds against a shortfall.

According to the supervisor, the credit crisis following the US sub-prime mortgage market problems has had a limited impact on the Dutch pension sector so far.

"Few pension funds have direct investments in subprime-related paper, and the indirect exposure through hedge funds is not substantial either," it said.

"However, schemes have initially been hit by the worldwide correction of the equity markets and the decrease of the long-term interest rates," DNB noted.

During the third quarter, the average coverage ratio has risen to 156%, mainly thanks to the rise of the (volatile) long-term interest rates.

After factoring-in a yearly 2% indexation, the funding ratio is 117% on average, which is sufficient to keep pensions inflation-proof, the watchdog added.

However, the cumulatively granted indexation in the period 2000-2007 has fallen short of the average ambition level, and to make up for this, extra funding worth 1.4% indexation for workers and 1.8% indexation for pensioners and deferred members is needed, DNB has calculated.

That said, despite the financial shock between 2000 and 2003, the buying power of workers and pensioners remains virtually unchanged, it said.

Although the DNB spokesman made clear there are no recent figures available, the report indicated many pension funds are probably not ready for the full introduction of pension governance, as officially required by January 1, 2008.

"Most of the schemes have made the important decisions about the set-up of their governance, but are still struggling to fill the seats on their accountability bodies,"  pointed out Leny van der Heiden, acting director of the Association of Industry-wide Pension Funds (VB).

According to Van der Heiden, DNB has indicated it will be lenient in these cases during the first half of next year, but DNB's Schipholt declined to confirm this.

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com

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