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Dutch Cabinet forces pension funds to lower return expectations

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  • Dutch Parliament buildings in the Hague, the Netherlands

Dutch pension funds must significantly decrease their estimates for the future returns on AAA government bonds, the Cabinet has decided.

Following the recommendations of an advisory committee, the Cabinet agreed to lower the maximum bond-return estimate from 4.5% to 2.5%. 

Dutch pension funds use these parameters to draw up recovery plans and calculate pension contributions.

The committee concluded that the expected returns for AAA government paper should follow the forward curve.

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“Following current interest levels is not only more realistic but also improves consistency in rating liabilities,” said the committee, which set the maximum estimate for other fixed income investments at 3%.

The parameters committee also recommended that the maximum estimates for listed equity, other securities and property remain at 7%, 7.5% and 6%, respectively.

However, it said the maximum estimate for commodities should be lowered by 1 percentage point, due to the economic outlook and current commodity markets.

Pension funds can continue to use a price inflation estimate of 2%, according to the advisory body, which also suggested the maximum estimate for salary increases should be lowered from 3% to 2.5%.

The committee said it expected the changes to reduce estimated coverage ratios at Dutch pension funds.

The funding of an average scheme with a current coverage of 105% would be 100% under the current rules, it said.

The new parameters are expected to come into force as of 1 January 2015, together with the expected introduction of the new financial assessment framework (FTK).

At the moment, the FTK proposals are in the finishing stage.

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