Dutch regulator criticises optimism of ABP's recovery plan

De Nederlandsche Bank (DNB), the Dutch pensions regulator, has criticised ABP’s recovery plan for assuming that the €356bn scheme’s equity holdings will produce a 7% annual return in the coming years. 

According to a memorandum prepared by ABP’s board, the watchdog also pointed out that the civil servant scheme’s premium would contribute little to its recovery.

Within the memo, ABP’s board states that the margin for a premium reduction would be minimal next year, due to “several setbacks”.

The reduction will be needed to finance an increase in salaries for government workers.

ABP’s memo also reveals that the regulator, despite approving the pension fund’s recovery plan last summer, warned the scheme that the gap between its actual funding and required funding was the largest of all the 150 schemes with recovery plans.

The regulator pointed out that ABP had estimated it would need more than eight years to increase its coverage ratio from 97.1% to the required 128%.

The average recovery target of the other schemes is 6.5 years.

DNB chastised ABP for factoring in the maximum estimates allowed for equities (7%) and real estate (6%) and noted that the contribution of ABP’s premium to its projected recovery was the lowest of all surveyed schemes.

ABP’s ‘premium funding’ – which reflects the extent to which contributions drive new accrual – has dropped from 80% to approximately 67% as a consequence of the scheme’s switch from the consumer index to the salary index for inflation compensation, as well as its abolishment of premium levies.

Within the memo, the pension fund conceded that its contribution was low relative to its pensions accrual.

ABP’s board also lamented that last summer’s reduction of the ultimate forward rate – part of the discount mechanism for liabilities – had cut funding immediately by 1.9 percentage points. 

Based on current interest rates, it added, funding is expected fall by another 2.8 percentage points over the next 10 years.

ABP’s board said the low-interest-rate environment stood to prolong its recovery period by nearly six years and would require it to increase its contribution by 0.8%.