Dutch regulator De Nederlandsche Bank (DNB) has approved all but one of the 155 recovery plans submitted by underfunded pension funds.
However, it also noted that a number of pension funds – “mostly the larger ones” – had factored in the highest allowed return assumptions, and warned that proposed premiums failed to contribute to general improvement.
None of the recovery plans provides for rights discounts.
Some months ago, a rights cut appeared to be in the offing for a single pension fund, but it submitted a plan that will enable it to recover within 12 years without cuts, according to the regulator.
According to the regulator, a “small number” of schemes said they would fail to achieve the minimum required funding of 104% within five years.
In this event, they will need to apply a rights discount within this period.
The regulator said the projected recovery was driven largely by surplus returns, with anticipated returns of 4.7% on average.
On average, premiums did not contribute to improvement.
DNB said it was concerned about the application of the maximum allowed return assumptions, plans for “possibly premature” indexation or combinations of these factors.
It said it would begin to engage with potentially vulnerable pension funds, adding that it would also factor in feasibility checks, which need to be submitted before 1 October.
The recovery plans were drawn at the start of the year and do not take into account the impact on funding of the reduction of the ultimate forward rate (UFR) for discounting liabilities.
The UFR – cut from 4.2% to 3.3% – directly reduced pension funds’ coverage by 3 percentage points on average, according to the regulator.
It estimated the subsequent impact over the course of the recovery period would be an additional 5 percentage points.
This would be the case if current interest rates remained stable, which would lead to a decreasing UFR, it said.
The average recovery plan is based on a funding of 100.7%, including the UFR, at the start of 2015 and 104.5% at year-end.
According to pensions adviser Aon Hewitt, the coverage ratio of Dutch pension funds was 102% on average, as of the end of August.
Next spring, the recovery plans will be assessed in light of the pension funds’ position at year-end.