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Impact Investing

IPE special report May 2018

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Equities, bonds bolster coverage ratios at Dutch pension funds

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  • Traditional houses of Amsterdam, Netherlands

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The average coverage ratio of Dutch pension funds has increased by 1 percentage point in May, according to estimates from Aon Hewitt and Mercer. 

Aon Hewitt calculated a full percentage point increase to 110%, while Mercer placed the increase at approximately 0.7 percentage points to 111.1% at May-end.

Aon Hewitt attributed the improvement chiefly to the strength of equity and bond returns at Dutch schemes.

The company said Dutch funds’ average assets grew by 2.9%, mainly due to an average 2.1% return on their bonds portfolios.

The value of equity holdings increased by 3.9%, while the other asset classes also generated positive returns, according to the consultancy.

It noted that pension funds’ liabilities had increased by approximately 1.7% in May as a result of falling interest rates, which also negatively affected the three-month average rate.

Pension funds must discount the value of liabilities against the three-month average of the market rate under application of the ultimate forward rate (UFR).

Dennis van Ek, principal and actuary at Mercer, underlined that pension funds with a relatively large hedge of the interest risk on their liabilities – and also having a large equity portfolio – performed best in terms of funding last month.

He warned that the official coverage ratio would fall by approximately 2.5 percentage points if the market rate were to remain at the same level over the next three months.

According to Van Ek, the average funding based on the market rate virtually remained unchanged at almost 105% in May.

In other news, SPW, the €8.8bn pension fund for housing corporations, saw its funding ratio increase by 2.2 percentage points to 116.2% over the first quarter, on the back of a 5% overall return.

The quarterly result included 2.8 percentage points of return from interest swaps, as well as a loss of 0.1% on its currency hedge.

Private equity and government bonds returned 5.6% and 4%, respectively, with credit returning 2.5%.

The pension fund further reported returns of 2.2% and -0.7%, respectively, on developed and emerging market equities.

Returns on property (3%), hedge funds (1.3%) and infrastructure (2%) were positive, whereas the scheme lost 1.5% on its opportunities portfolio.

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