The five largest pension funds in the Netherlands saw their coverage ratios drop again over the third quarter, largely as a result of falling interest rates and declining equity markets.
The official ‘policy’ coverage ratio – the criterion for indexation and rights cuts – at the €161bn healthcare scheme PFZW and the €39bn metal pension fund PME dropped to 99%, while funding at the €59bn metal scheme PMT fell to 99.8% and the €345bn civil service scheme ABP to 99.7%.
BpfBouw, the €47bn pension fund for the Dutch building industry, was the only scheme to buck the trend, reporting a coverage of 112.3% over the period.
Under recovery rules spelled out in the new financial assessment framework, Dutch pension funds must apply rights cuts if funding drops to 90% or lower.
The Netherlands’ larger pension funds reported quarterly losses ranging from 0.8% (BpfBouw) to 3.2% (PFZW), citing uncertainty over the Chinese economy and volatile investment markets resulting from central banks’ “opaque” interest policies.
Eric Uijen, director at PME, said falling interest rates were likely to cause a further decrease in policy funding, calculated using the average coverage over the previous 12 months.
PME reported a loss on investments of 2.5%, including a 0.6% return on the 50% interest hedge of its liabilities.
The negative impact of falling rates on schemes’ funding was exacerbated by the reduction of the ultimate forward rate (UFR) for discounting liabilities, lowered from 4.2% to 3.3% in July.
BpfBouw said its liabilities increased by 6.2% as a result of the combined effect, while PME attributed almost half of the 6% increase in its liabilities to the new UFR.
The pension funds incurred in particular losses on equity, which varied between 8.8% (PME) and 10.6% (ABP), with the latter losing no less than 17.5% on equity emerging markets.
Equity holdings fared particularly badly over the period, with PME reporting an 8.8% loss for the asset class.
ABP reported a 10.6% loss on equities and a 17.5% loss on emerging market equities.
Falling oil prices hit PFZW, which reported a 23.6% loss on its commodity holdings.
Fixed income, however, delivered positive results for all the larger schemes, with ABP reporting a 1.1% return on nominal investments and a 4.8% return on long government bonds.
PFZW saw its fixed income portfolio return 3.1%, while PME’s portfolio returned 0.1%.
The Netherlands’ larger pension funds have struggled to produce positive returns over the first nine months of the year.
Only ABP (0.8%) and PMT (0.5%) have managed to record positive returns year to date.
PFZW and PME lost 1.2% and 1.1%, respectively, over the same period, while BpfBouw has more or less broken even.
The Dutch Pensions Federation, responding to the quarterly results, warned that indexation was increasingly “disappearing from view” for millions of participants and pensioners.