Dutch pension funds will be allowed to make the transition to the new defined contribution-based contract by 2026 with a funding ratio of only 95% instead of 100%, according to draft legislation presented yesterday.

Funds that fall short of the new minimum funding ratio of 95% at the end of 2021 will have to submit a “transition plan” to regulator De Nederlandsche Bank (DNB) outlining how it will reach its target funding ratio by 2026, in order to avoid having to cut pensions before, according to the draft bill, which is expected to be sent to parliament for approval in mid-2021 following parliamentary elections scheduled for March.

The target funding ratio for pension funds will be at least 95%, but could be set higher for individual funds.

A technical analysis by DNB has shown that an average pension fund will be able to meet its pension obligations if it has a funding ratio of 95% at the moment of transition, the government said.

Any pension fund with a funding ratio below 90% at the end of any given year will have to cut pensions immediately, however.

“Such a threshold prevents funds from pushing forward major financial problems during the transition phase,” pensions minister Wouter Koolmees said in a letter to parliament.

Preventing pension cuts at all costs could endanger “a balanced transition that is fair for all generations,” he added.

Koolmees had already announced earlier that funds with a funding ratio of at least 90% at the end of this year would not have to cut pensions in 2021.

Funding ratios improve

Last month, the funding ratios of the country’s two largest funds ABP and PFZW exceeded the critical 90% mark for the first time since the outbreak of the coronavirus pandemic.

According to consultancy Mercer, the funding ratio of an average Dutch pension fund stood at 99% at the end of November.

The PensioenFederatie, the Dutch association for pension funds, welcomed the lower funding ratio threshold. “We think making the transition with a funding ratio of 95% [instead of 100%] will provide a sufficient basis for a balanced distribution [of pension capital] between the different age groups within each pension fund,” its interim president José Meijer told IPE.

The organisation noted, however, that there’s still a chance pensions will have to be cut over the next two years, not least because of the upcoming adjustment of the Ultimate Forward Rate (UFR) that is used to calculate pension funds’ liabilities.

The new UFR will be implemented gradually between 2021 and 2024.

May pensions funds in the country have recently announced contribution hikes and reductions in new accruals to address their funding situation.

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