Dutch pension funds’ coverage ratios plummeted in January, pushing many schemes into funding shortfalls, consultancies have warned.
Average funding, according to estimates by Aon Hewitt and Mercer, fell by 5 percentage points over the period, due to persistently low interest rates, the criterion for discounting liabilities.
Aon Hewitt concluded that average funding at the end of January came to approximately 103%, while Mercer, drawing on slightly different figures, placed the ratio closer to 104%.
The consultancies also attributed the sudden drop in funding to a new accounting method for calculating coverage ratios.
Since 1 January, when the Netherlands introduced its new financial assessment framework (FTK), schemes’ funding has been based on actual interest rates while applying the ultimate forward rate (UFR), rather than the three-month average of interest rates plus UFR.
In addition, the new FTK came with a ‘policy funding ratio’ – meant as a criterion for rights cuts and indexation – consisting of the average coverage of the previous 12 months.
According to Aon Hewitt, policy funding stood at 109% at January-end, while Mercer placed the figure at 109.6%.
Explaining the difference between actual coverage and policy coverage, Edward Krijgsman, monitoring team leader at Mercer, pointed out that policy funding still contained an entire year of the three-month average.
Krijgsman – together with Frank Driessen, chief commercial officer for retirement and financial management at Aon Hewitt – predicted that the policy funding ratio would fall if the actual coverage failed to improve.
Pension funds with less than 110% in policy funding are currently prohibited from granting indexation.
Driessen said the ECB’s recently announced quantitative-easing programme had led to a further slide of interest rates and predicted that rates would remain low for “a long time”.
Aon Hewitt also noted that the value of Dutch pension funds’ fixed income allocations increased by 5.2% in January, while equity increased by 5.7%.
European equity increased by 7.2% over the period.
Mercer’s Krijgsman said investors from the euro-zone invested outside the area also benefited from currencies appreciating last month.
The US dollar, the British pound and the Japanese yen rose by 7%, 3% and 9%, respectively, against the euro he said.
However, the 5.6% increase in the average Dutch portfolio in January was offset by an increase in liabilities of more than 10%, Aon Hewitt said.