Dutch regulator adopts new discount rate for pension funds
NETHERLANDS - The Dutch regulator (DNB) has adopted a new discount rate for pension funds that takes into account a 4.2% 'ultimate forward rate' (UFR), similar to the term structure for insurers.
However, with the presentation of the so-called 'September package', the DNB also made clear that the methodology would differ from the one used for insurers, the main difference being that the term structure for pension funds will take market rates into account for durations beyond 20 years.
In addition, pension funds will continue to apply a three-month average rate to discount liabilities; for insurers, the three-month average rate is cancelled once they begin to apply the UFR.
Pim van Diepen, actuary and principal at Mercer, said the UFR had effectively raised the average pension scheme's funding ratio by approximately 3 percentage points.
As a result, the average coverage ratio will be 101-102%, he said.
"The term structure as published by DNB is as we expected," he said. "The UFR as presented now offers several advantages over the UFR methodology as proposed in Solvency II for insurers.
"By taking market rates into account beyond the 'last liquid point', valuation and risk management will be less sensitive around the 20-year swap rate.
"This prevents pension funds from having to make too many changes to their interest rate hedges or having to continuously rebalance."
But Van Diepen also predicted that pension funds and insurers would be expected to use the same interest rate term structure in future.
"We expect regulators on a European and national level will aim for a uniform UFR that will apply to both pension funds and insurers once Solvency II has been introduced," he said.
Van Diepen said he hoped the UFR adjustments introduced in the Netherlands as a result of pension funds' lobbying efforts would also be adopted at the European level.
"A decision on Solvency II has been put on the European Parliament agenda for 20 November, but, because this has been postponed twice before already, I would not be surprised if this were to be postponed again," he said.
Earlier this week, Aon Hewitt also estimated that Dutch schemes' average coverage ratios would increase to about 102% when employing the UFR.
The ministry of social affairs introduced the UFR at the end of last month, as a transitional measure ahead of a new financial assessment framework (FTK), which is to come into force in 2014. At the time, it estimated the UFR will reflect a rate of 4.2%.
The UFR replaces the forward curve, which caused significant volatility in coverage ratios; the DNB allowed pension funds to apply the three-month average of the forward curve for this reason.