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IPE special report May 2018

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FTK to hit Dutch pension funds' coverage ratios, consultancies warn

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Aon Hewitt has warned that a number of Dutch pension funds will find themselves with insufficient financial buffers when the new financial assessment framework (FTK) is enacted if their coverage ratios fail to improve significantly in the coming months.

Frank Driessen, chief commercial officer for retirement and financial management at the pensions adviser, said: “This would threaten to erode their indexation potential and might even lead to new rights discounts.”

Driessen also argued that the lower discount rate for liabilities under the new FTK would generally hurt schemes’ funding. 

Edward Krijgsman, team leader for monitoring at Mercer in the Netherlands, agreed.

“If the Ministry of Social Affairs is to adopt the recommendations of the ultimate forward rate committee, the new discount rate would be slightly lower than the current one and result in a lower coverage ratio,” he said.

However, he said he could not confirm whether a lower discount rate would lead to new rights cuts.

“So far, we haven’t conducted exact calculations about the effects on the funding of a new curve,” he said.

“In the new situation, for example, the current three-month average of the discount rate would be abolished.”

Krijgsman pointed out that Jetta Klijnsma, state secretary for Social Affairs, had said no rights discounts needed to be applied at the end of 2014, and that, under the new FTK – still scheduled to come into force on 1 January 2015 – cuts could be spread out over a 10-year period.

Driessens’s response came on the back of calculations of the average coverage ratio, which were, according to Aon Hewitt, stable at 109% in April but so far have not improved in 2014.

The company said liabilities increased by 1.9% in April in the wake of falling interest rates, which caused the three-month average of the discount rate to fall.

On the other hand, the assets of Dutch pension funds grew by 1.4% on average, largely thanks to a 1.7% increase in fixed income holdings, but also due to a value increase of equity investments of 0.3%, according to Aon Hewitt.

Mercer, which linked its calculations to the most recent figures of supervisor De Nederlandsche Bank (DNB) also concluded that average funding had hardly changed, estimating a 0.1 percentage point drop to 110.4% in April.

According to Krijgsman, the 30-year swap rate dropped from 2.55% to 2.45% in April, while the three-month average of the discount rate fell from 2.66% to 2.6%.

Dennis van Ek, principal and actuary at Mercer, added that, based on the actual market rate at April-end, the average coverage ratio of Dutch pension funds would have been 104.8%.

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