Dutch pension funds must expect a further drop of their coverage ratio over the course of October, consultants Mercer and Aon Hewitt have warned. 

Dennis van Ek, actuary at Mercer, is forecasting this month will see a drop of 3 percentage points for the average pension fund, in part following the continuing decrease of interest rates – the criterion for discounting liabilities.

He noted that the 30-year swap rate had gone from 1.91% to 1.95% during the first half of the month.

“Although the increased value of bonds and the rise of liabilities following the rates’ drop are reasonably balanced, equity markets have also fallen in October, with the MSCI World Index and the MSCI Europe losing 7% and 9% respectively,” he said.

“As a result, the average pension fund lost between 2 and 3 percentage points of funding.”

The actuary argued that, if market rates remain at the current level, the official discount rate for liabilities – the three-month average of the market rate plus the ultimate forward rate (UFR) – would decrease further.

“This would take off another percentage point from the coverage of the average scheme,” he said.

Van Ek was no more positive for the fourth quarter. “As things stand now, the official discount rate at October-end would still be 0.2 percentage points above the current market rate. If interest rates don’t drop any further, the average funding would decrease by another 3 percentage points during the following three months,” he pointed out.

However, the actuary stressed that the outcome of his prediction would very much depend on the level of the interest rates, “which is quite volatile at the moment”.

In part based on data of supervisor De Nederlandsche Bank (DNB), Mercer concluded that the average pension fund closed September with a funding ratio of 109%.

However, the €334bn civil service scheme ABP and the metal schemes PMT and PME already reported a funding shortfall, with coverage ratios of 103.1%, 102.8% and 102.6% respectively at September-end.

According to Van Ek, many pension funds have not been able to fully compensate for the losses incurred at the start of the financial crisis in 2008.

Pensions advisor Aon Hewitt said it is expecting a funding drop of 3.5 percentage points for the average pension fund during October.

As the consultant estimated the funding of the average scheme at September-end at 108%, this would lead to a drop to 104.5%, the minimum required coverage.

Mike Pernot, actuary at Aon Hewitt, said the coverage ratio already dropped by 2.2 percentage points during the past two weeks.

He noted that this decrease would even have been 4.7 percentage points under the new UFR rules that come into force on 1 January 2015.

Had the new UFR already been applied at the end of September, the funding of the average scheme would have been no more than 103.8%, and would have been 99.1% at the moment, according to Pernot.