NETHERLANDS - Pensions regulator De Nederlandsche Bank (DNB) has warned the Dutch pensions sector has a long way to go to a full recovery, despite no longer being seriously underfunded.

The warning came within the pensions watchdog's quarterly update, which showed the average cover ratio of the Dutch pensions sector remained stable at 109% during the last quarter of 2009.

The Financial Assessment Framework (FTK) requires pension funds to achieve a minimum cover of 105%, but also prescribes financial buffers equate to a funding ratio of between 125% and 130%, depending on a scheme's the risk-return ratio on its investment mix.

The DNB noted the recovery is largely thanks to the rise in the markets since hitting a recent low in March last year.

"That said, in contrast to a year ago, when decreasing interest rates drove the cover ratios down, interest rate developments have only slightly affected the funding ratio," the DNB claimed.

"In addition, the cutback of pension claims has had a positive, albeit limited, effect on the cover ratio during the first six months of 2009."

DNB said the difference between the cover ratios of the 14 largest Dutch pension funds has decreased since the end of last year, and now varies at between 100% and 137%.

The pensions watchdog further claimed many pension funds have postponed rebalancing their assets mix because of ongoing strong volatility in the markets, and this has in turn resulted in a significant drop of their equity allocation.

Increased hedging of interest rate risks through derivatives, since the burst of the dot-com bubble earlier this century, has made pension funds less susceptible to interest rate risks, the DNB added.

It also claimed the Dutch insurance sector was a net seller of equity during the third quarter, following a long trend to decrease their equity portfolios in favour of fixed income investments.

Insurers' combined fixed income portfolios increased from 47% of their assets in 2002 to 68% at the end of 2009, according to DNB.

Just over 50% were invested in governments bonds, and the majority of these bonds carried a AAA rating, it indicated.

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