NETHERLANDS – The €70m pension fund of pensions provider A&O has said it may need to cut pension rights by as much as19% over the next three years.

The news comes after the scheme revealed that its coverage ratio dropped to 86% at the end of December last year.

In a letter to its 500 participants, the board announced a rights discount of 7% during both 2013 and 2014, and further cuts in 2015.

Rudolf de Soet, director of employer A&O Services and chairman of the pension fund, attributed the poor funding mainly to falling long-term interest rates coupled with rising longevity.

"Because of the scheme's limited scale, it cannot afford an interest hedge through swaps or swaptions," he said.

“Therefore, we have invested 10% of our assets in 50-year French and Italian government bonds in 2008. This investment suffered from the euro crisis in 2011.

"However, following stabilising markets in the euro-zone, bonds have bounced back in 2012. As a result, they have been a main contributor to our last year's return of at least 16%, which is likely to raise our funding."

De Soet said the A&O scheme was in merger talks with larger industry-wide schemes, but declined to provide further details.

Since 2006, the employer has paid a contribution of 21%, which is 1.75% more than the earlier agreed maximum.

Employees pay 2% to accrue additional pension rights.

The A&O director stressed that the company's clients were "doing well".

For example, the €4bn industry-wide scheme for painters and decorators – Schilders – has a funding of 110.5%, he said.