The steep increase in interest rates over the past year has propelled funding ratios of Dutch pension funds to their highest levels since 2008, according to Aon and Aegon Asset Management.

Aon has reported an average funding ratio of 128% at the end of August, based on data provided by regulator DNB. This is an increase of six percentage points compared to a month earlier.

According to Aegon AM, the average funding ratio is somewhat lower at 124.5%. Both firms use different methods to calculate funding ratios, hence the different outcomes.

The increase in interest rates has had the biggest impact on funding ratios in the past year. The DNB Ultimate Forward Rate (UFR), which is used to calculate pension funds’ liabilities, for a duration of 20 years (the average duration of a Dutch pension fund’s liabilities) has risen by more than 200 bps over the past year to 2.33%.

Funding ratios have risen by 16 percentage points on average over the past year, despite steep investment losses. In the first half of 2022, Dutch pension fund assets decreased by €299bn.

Losses continued in August with equities down 2.5% and bonds a whopping 11%. However, liabilities decreased faster than assets under management, resulting in record-high funding ratios.


The higher funding ratios provide pension funds ample room to index pensions and compensate members for rampant inflation, which hit a record 13.6% in August. “Pressure to index second-pillar pensions will be huge,” said Frank Driessen, chief executive officer, Wealth Solutions, at Aon Netherlands.

Few pension funds will, however, compensate members fully for inflation, according to Driessen. “Indexing pensions by 13.6% will also lead to a decrease in funding ratios of the same scope. Most funds cannot afford this as they prefer to retain something of a buffer to prepare for the upcoming transition to a DC system.”

UK funding ratios

Aon, latest report – Pension scheme funding: an analysis of completed valuations – published this week, shows that the average funding position and proportion of UK pension schemes in surplus are also at their highest levels since the start of the current funding regime.

However, for schemes in deficit, the average recovery period has fallen by only 1.2 years over the last three years.

In addition, reaching full funding against the existing funding target will not be the end of the story for most UK schemes, Aon argues in the report. The recent publication of the Department for Work and Pensions’ consultation on long-term funding and investment strategy increases the focus on the long-term funding target and the journey plan, to reduce reliance on the employer covenant and achieve ‘low dependency’ as a scheme matures.

This will typically require a lower risk investment strategy and a higher funding target once a scheme is ‘significantly mature’. Ahead of this becoming a legislative requirement, the majority of schemes have already set such a target along with a journey plan to get there, in line with regulatory guidance.

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