Falling equity markets are dragging funding at four of the Netherlands’ five largest pension funds down to the 100% mark.
The official ‘policy’ coverage for the €40bn metal scheme PME, as of the end of August, has dropped below 100%, which disallows it from transferring pension rights for leaving participants.
Policy funding, the criterion for indexation and rights cuts, is calculated using a scheme’s average coverage over the previous 12 months.
PME’s policy funding now stands at 99.8%, while its current coverage is 96.1%.
Current funding at the large civil service scheme ABP (98.1%), the healthcare pension fund PFZW (96%) and the metal scheme PMT (96.4%) has also dropped below 100%, but their policy coverage remains slightly above this level.
According to Mike Pernot, an actuary at Aon Hewitt, coverage ratios for Dutch pension funds over the first three weeks of this month fell by 2 percentage points on average to 100%.
For now, the lower funding will only affect value transfer.
From 2017, however, schemes’ coverage figures will serve as the basis for updating recovery plans, which must spell out how pension funds expect to raise their funding ratios to as much as 125% over the next 10 years (depending on their asset mix).
None of the more than 150 recovery plans submitted to regulator last July mooted a rights discount as a means of shoring up funding.
A pension fund, to recover on schedule, must apply rights cuts only if its coverage ratio falls below 95%.
The critical funding ratio, however, depends on a scheme’s investment policy.
Pension funds with more offensive investment target – having a relatively large equity allocation, for example – need to apply a rights discount at a funding of approximately 90%.
BpfBouw, the €48bn pension fund for the building sector, is the only large scheme that managed to keep its funding well above 100%.
As of the end of August, its policy coverage stood at 112.9%.