NETHERLANDS - The Dutch pensions supervisor, De Nederlandsche Bank (DNB), has reported in its November financial stability report that the financial situation of pension funds remains vulnerable, writes Mariska van der Westen for our Dutch sister publication IPN. The DNB says that funds have not yet recovered, even though they have profited from improving markets.

Despite the fact that coverage ratios remain above 100%, they are far from the 130% buffer that the DNB considers necessary to remain shock proof and to be able to grant indexation. Further, the DNB regards the market sentiment as "still fragile", and stresses the need to take "continuous, large downside risks" into account.

Depending on the speed at which the sector recovers, the DNB warns that the real economy may encounter disruption from pension losses because funds are unable to grant indexation and in some cases must raise contributions. The DNB had previously reported that this may amount to a cumulative cost to the economy of 0.75 percentage points of gross domestic product in the years from 2009 to 2013.

The supervisor is monitoring individual funds' recoveries and says it is looking "closely" at funds' investment policies.

The investment mix of pension funds has changed in the course of the crisis, mainly because of stock market developments. Pension funds invested 41% in equities, 43% in fixed income, 11% in real estate and 5% in other investments at the third quarter of 2007. By the second quarter of 2009 this had changed to 32% in equities and the fixed income portion had increased to 53%. Real estate and other investments remained at 10% and 5% respectively.

The number of pension funds has also strongly decreased, although the DNB says in its report that further efficiency gains can be made in the pension sector through consolidation.

The number of pension funds has decreased to below 600 for the first time, according to the report, a decrease of almost 9% in the less than a year. Ten years ago the number was above 1,000, and the tendency has been for 30-40 funds each year to cease.

"At the end of 2007 there were 713 pension funds and at the end of 2008 there were 656. At the end of the second quarter of 2009 there were still 612," said Herman Schipolt, a spokesman for the DNB.

Company pension funds primarily account for the strong decrease. The supposition is that smaller company funds are succumbing to the burden of governance and supervisory demands. The government is currently working with the sector on ways to decrease the burden and on legislation that will allow funds unable to continue under their own steam to co-operate at management level.

According to the register of pension funds held by the DNB, the total number had dropped to 598 by October this year. Where there were 714 company pension funds in 2004, that number is now 492.