The European Central Bank’s (ECB) decision to reduce deposit rates and extend its quantitative easing programme is likely to have a limited impact on the average Dutch pension fund’s coverage ratio, consultancies have said.
In the wake of the ECB’s announcement, the 30-year swap rate – Dutch schemes’ most important criterion for discounting liabilities – increased from 1.48% to approximately 1.6%.
At the same time, however, equity markets fell, with the AEX and the Stoxx 50 losing 1.6% and 1.8%, respectively.
Dennis van Ek, an actuary at Mercer, said: “The short-term effects on pension funds’ coverage are positive because of the rate increase, but they are negative following dropping equity markets.”
He said Dutch pension funds with small interest-risk hedges and limited equity holdings could expect a modest funding improvement.
Schemes with extensive interest hedges and relatively large stock portfolios, however, are likely to have the “opposite perspective”, he said.
On balance, Mercer believes the rate increase’s impact on Dutch pension funds’ coverage ratios will slightly exceed that of falling equity markets.
Neither did Geert-Jan Troost, an investment consultant at Towers Watson, expect Dutch schemes’ coverage ratios to be affected significantly.
But Troost noted that those pension funds recently reducing their interest hedges – permitted by regulator DNB as a one-off opportunity to increase their risk profiles – were now at an advantage.
Corine van Egmond, ALM consultant at Aon Hewitt, highlighted that the effect of the ECB’s measures would depend on where pension funds’ stock holdings were concentrated.
“The funding of a scheme with a relatively large stake in the US will be less affected, as equity markets over there have been relatively stable,” she said.
“On the other hand, the rate increase will have a negative impact on euro-denominated government bonds, which will affect the funding of schemes with an extensive fixed income portfolio.”
Mercer concluded that the ECB aimed to keep interest rates low for at least the next year.
“Pension funds should, therefore, not expect their funding to improve as a consequence of rising interest rates,” Van Ek said.