NETHERLANDS - Pensions regulator De Nederlandsche Bank said today it will not reconsider the way pension funds have to calculate their liabilities.

In a letter to funds it wrote that it will not adjust the yield curve of the inter-bank swap market, following the volatility in the long-term swaps of the past few months.

DNB hinted at the changes mid-December, though it made no further announcements at the time. (See earlier IPE story DNB hints at change to liability discounting)

"The distortions on the inter-bank swap market have clearly decreased during the last weeks of 2008," DNB said in an official statement today.

"The same goes for deviations in respect of the yield curves of government bonds," the regulator added.

Every month DNB publishes a yield curve based on the inter-bank swap market. The curve is used by pension funds to calculate their liabilities, while insures apply the data for their sufficiency test.

The yield curve is not only important for calculating pension liabilities, it also plays a crucial role in recovery plans for under-funded pension schemes.

The future development of the yield curve - the ‘forward curve' - in recovery plans is derived from the current yield curve.

"Since the difference between the swap curve and the government bond curve was only two percentage points of pension funds' cover ratio at year-end, we agree withthe  DNB's decision," Arnold Jager, actuary and consultant at Hewitt Associates, commented.

"However, the difference has more than doubled to five percentage points in the meantime. We think pension funds should take this into account when they decide on hedging their interest risks, or carry out a continuity analysis or an asset-liability study," Jager argued.

Dennis van Ek, actuary and partner at Mercer Consultants, also indicated support. "The current swap curve is almost similar to the important curve of German government bonds at present," he explained.

According to Van Ek, the current swap market is far from being liquid. "It is almost impossible to move €1bn worth of swaps without upsetting the market," he said.

Pim van Diepen, also of Mercer Consultants, made clear that the returns on government bonds have increased almost twice the rate of the 30-years swap interest during the first week of 2009.

"The spread between government bonds and swap interest has risen from -0.05% to 0.11% during the same period," he added.

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