The year-on-year impact of a financial market shock on the Dutch economy through the country’s pension funds would be limited, but felt for many years, the Dutch regulator has said on the basis of the latest stress test of European pension funds by supervisor EIOPA.
DNB implied the financial market shocks would have a disproportionate impact on the Dutch economy and pension funds because of the relatively large pensions sector in the Netherlands.
In the stress test EIOPA assessed the impact of a highly adverse scenario consisting of significant falls in equity markets and rapidly rising spreads.
New in the stress test was the elaboration of the cashflow analysis – showing the value of benefits, including indexation and rights cuts, participants would receive annually during the coming 100 years. The analysis had been requested by DNB and the Dutch Pensions Federation.
DNB explained that under the scenario, the effect of pension funds refraining from offering inflation compensation and making rights cuts would only become clear gradually.
It said that, in the very negative scenario, disposable income could drop by 4% and could lop off 0.5% of GDP.
DNB added that the losses incurred during the financial crisis in 2008 had attributed to the slow economic recovery in the Netherlands, as a consequence of the scale of the Dutch pensions sector, which has €1.4trn in assets.
EIOPA’s stress test focussed on a sharp decline of securities – including equities and real estate – slightly higher interest rates as well as rapidly increasing risk premia, while assuming that “safe haven investments” kept their status.
DNB attributed the hit to Dutch pension assets in such a scenario to schemes’ large portfolio of variable yield investments maintained to fund indexation.
It said that funding at the pension funds that participated in the stress test exercise would drop by 23 percentage points on average, which roughly equates to schemes’ required financial buffers.
As most pension funds – with a funding of 99% on average – lack these reserves, the stress scenario would immediately lead to large rights cuts, according to the Dutch watchdog.
The stress test also showed that assets of Dutch low cost defined contribution vehicles (PPI) would drop almost 30%, mainly as a result of the equity stress.
Because of their relatively young participant population, PPIs have a relatively large portfolio of variable yield securities, such as equity.
The Dutch pension funds that participated in the stress test were civil service scheme ABP, healthcare pension fund PFZW, the metal schemes PME and PMT, as well as the pension funds for the building industry (BpfBouw) and the retail sector (Detailhandel), and ABN Amro.
Together, they represented 60% of total pension assets and participants in defined benefit arrangements in the Netherlands.