NETHERLANDS - Coverage ratios at Dutch pension funds are likely to fall again if equity markets remain flat and long-term interest rates are kept at their currently low levels, according to Mercer.
If this occurs, the pension regulator’s recent softening of liability-discount rules will have little impact, said Dennis van Ek, actuary and principal at the consultancy.
At the end of last year, the regulator ruled that pension funds would be allowed to discount their liabilities against a three-month average, rather than the daily swaps yield curve.
The measure boosted pension schemes’ funding by approximately 3 percentage points to 98% on average, according to Van Ek.
However, 30-year swap rates have fallen from 2.55% to 2.47%, while the three-month average has dropped from 2.74% to 2.66%, leading to a coverage ratio of 97% on average.
“A slight rise of equity markets in the meantime has not fully compensated for the funding drop,” Van Ek said.
According to the actuary, the average coverage ratio would be no more than 94% were the actual long-term interest rate applied - a decrease of 1% since year-end.
Van Ek also claimed the regulator’s recent measures will have varying effects on different types pension funds.
“Schemes with many young participants benefit the most, as they have a longer duration, with most benefits to be paid further in the future,” he said, estimating the positive effect on the funding ratio at 3.5-5%.
“However,” he added, “the coverage of schemes with many participants nearing retirement has been boosted by 2% to 3% on average.”
The actuary said it was unclear how long the regulator would keep the three-month average discount rate in force.
A large number of Dutch pension funds are expected to publish their most recent coverage ratios tomorrow.
They are also expected to announce the benefit cuts they will need to apply in order to get their recovery plans back on track.