NETHERLANDS - The pensions regulator De Nederlandsche Bank would prefer pension funds with a shortfall of their financial reserves to gradually recover, rather than to base this process on discounting the pension claims of their participants, consultants have suggested.

DNB would not therefore accept a claims cut as part of a recovery plan right away, officials are said to have indicated during a closed doors meeting with pension funds earlier this week.

According to pensions experts at Hewitt Associates, DNB wants pension schemes to submit a recovery scenario without a claims cut, if a discount to benefits is part of their initial recovery plan.

The regulator would ideally like to see an alternative scenario submitted in situations where a claims cut is being proposed so it could prescribe a tailor-made solution, such as granting an extra recovery year, Hewitt suggested, though this flexibility would not apply to a short-term recovery plan.

Pension funds with a funding ratio of less than 105% must submit a three-year recovery plan to DNB before 1 April. However, schemes with a shortfall of the required financial buffers - correlating with a cover ratio of less than approximately 125% - are required to explain how they will close the gap within 15 years.

In the opinion of DNB, underfunded schemes with a considerable shortfall after three years must take a balanced approach towards all participants in the case of a claims cut, Hewitt has suggested.

That said, schemes with a very small chance of a timely recovery have been advised to consider applying a discount at an earlier stage, to avoid disadvantaging their active participants.

Pension funds must also apply DNB's yield curve when calculating the liabilities in their continuity analysis and recovery plan, according to consultants.

"Because the forward interest curve for the long-term decreases over time, and given the recent market volatility as well as the growing uncertainly at the end of the time scale, DNB has shown willingness to accept a fixed forward curve after five years," Hewitt suggested.

Arnold Jager, consultant at Hewitt Associates, said: "This approach will have a significant positive effect on the expected cover ratio, as the liabilities of an average pension fund will be 14% less at the end of a 15-year term."

In his opinion, DNB's softened approach is an important concession to the pension funds which will help to ease their present problems.

A spokesman for the DNB declined to confirm the regulator's additional guidelines.

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