Dutch pension funds’ average coverage ratio has dropped suddenly by 1.5 percentage points to between 108% and 109% since the start of December, according to Mercer and Aon Hewitt.
The status of year-end funding is crucial for the question of whether pension funds must cut pension rights next year, following the expiration of their five-year recovery plans.
Dennis van Ek, actuary and principal at Mercer, attributed the sudden drop to a combination of widening swap rates and negative returns on equities.
“The 30-year swap rate has increased from 2.61% to 2.69%, causing a funding loss of more than 0.5 percentage points, as a consequence of the discount method for liabilities, based on the three-month average of the forward curve,” he said.
A 2.5% loss on equities – following a 1.4% decrease on the MSCI World index and a 3.4% loss on the MSCI Europe Index – has caused funding to drop by another 0.75 percentage points, according to Van Ek.
He further noted that the official discount rate for liabilities dropped slightly, at the expense of up to 0.25 percentage points of the average funding.
The recent developments do not bode well for pension funds, with an average funding of 104.3%, approximately the minimum required level.
Last week, the €48bn metal scheme PMT said its coverage might end up a couple of dozen basis points short of the legal minimum.
A marginal difference would likely complicate a decision regarding cuts, as it would further undermine the support for the pension fund among its participants, it argued.
Based on an average funding of 110% at the end of last month, Aon Hewitt predicted that as many as 37 pension funds were facing rights cuts.
For example, at November-end, funding at the €355m Pension Fund Campagne and the €1.2bn occupational pension fund for public pharmacists (SPOA) was 97% and 102.1%, respectively.
The industry-wide schemes for hairdressers (Kappers) and dental technicians (Tandtechniek) reported coverage ratios of 103.8% and 102.9%, respectively, at the end of October.
Aon Hewitt’s ‘pensions thermometer’ indicated an average funding of 109% on Monday, after a low of 108% last Thursday.