DNB sticks firm to yield curve for liabilities

Related images

  • DNB sticks firm to yield curve for liabilities

NETHERLANDS - Pensions regulator DNB is sticking to its earlier position stating it will not consider an instrument change for calculating liabilities, despite continued calls from the industry.

A statement from the DNB follows fresh pressure from the pension industry urging DNB to allow pension funds to base their liabilities on the interest rate of AAA government bonds instead of the yield curve of the inter-bank swap rates, as pension experts claim it is the instrument which is causing unnecessarily low cover ratios.

"The mandatory method for calculating liabilities makes pension funds poorer than they actually are," claimed Arnold Jager, of consultancy firm Hewitt Associates.

"Schemes which had invested in risk-free AAA government bonds saw their liabilities increase and their cover ratio drop as a consequence of the unnaturally low swap rate," argued Jager.

The consultancy has calculated the increased difference between the swap curve rate and the AAA bonds' rate has led to a drop on the cover ratio of almost 10%.

According to Hewitt - which attributed the difference in rates to a lack of liquidity in the market - the effect on funding ratios could mean the difference between cutting benefits for pensioners and less stringent measures.

"As soon as an alternative accounting rate is allowed, the difference between both curves will decrease, and the values in the swap market will return to normal," predicted Hewitt.

The consultancy said an investment in risk-free AAA government bonds at the end of 2008 would have led to a cover ratio of 106% if the pension fund had calculated its liabilities on the bonds' rate, whereas the mandatory swap curve has resulted in a funding ratio of no more than 100.3%.

Dennis van Ek, partner at consultancy firm Mercer, agreed with Hewitt on the disadvantage caused by the swap curve rate.

"Applying the swap rate does not currently make sense, as it is now lower than the rate on German AAA bonds, which have the lowest rate of all eurozone Treasury Bonds," commented van Ek.

That said, in his opinion, abandoning the swap curve rate will not ease the task of drawing up recovery plans by pension funds.

"Recovery plans must be based on the situation at the year-end, when the swap curve rate was higher than the rate on German bonds," he said.

At the end of February, the rates of 30-year swaps were 0.2% and 0.6% lower than the long-term AAA government bonds' rates offered in Germany and the Netherlands respectively, according to Van Ek.

"The large demand for long-term interest swaps may be caused by Dutch pension funds which want to hedge the interest risks on their liabilities," he suggested.

Van Ek attributed the limited swaps on offer to banks' low levels of lending and the disappearance of a number of derivatives providers, such as Lehman Brothers.

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

Have your say

You must sign in to make a comment


Your first step in manager selection...

IPE Quest is a manager search facility that connects institutional investors and asset managers.

  • QN-2519

    Asset class: Fund wrapper.
    Asset region: Global.
    Size: EUR 80m.
    Closing date: 2019-03-29.

Begin Your Search Here