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New FTK to hit Dutch pension funds' coverage ratios, consultancies warn

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Industry experts have warned that coverage ratios at Dutch pension funds could fall by as much as 5 percentage points under the new financial assessment framework’s (FTK) discount rules for liabilities.

Frank Driessen, chief commercial officer for retirement and financial management at Aon Hewitt, estimated that average funding, under the new FTK, would have been 106% at July-end, rather than the current 111%. 

Dennis van Ek, a principal and actuary at Mercer, agreed, saying new ultimate forward rate (UFR), applied for discounting liabilities, would contribute no more than 2.5 percentage points to the funding of an average scheme, rather than 4% of the current methodology.

Both Mercer and Aon Hewitt found that Dutch schemes’ average coverage ratios remained level in July, at approximately 111%.

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Mercer concluded that the average funding had dropped 1 percentage point in July, based on the most recent funding figures of regulator De Nederlandsche Bank.

In the opinion of Aon Hewitt, which uses the average strategic investment mix of Dutch schemes as guideline, the average coverage ratio increased by 1 percentage point last month. 

Mercer’s Van Ek said the official discount rate – the three-month average of the market rate with application of the UFR – for the average scheme was now 2.32%, below the three-month average. 

“If interest rates remained at their current level over the next three months, average funding would fall by 3 percentage points,” he said. 

Van Ek noted that the new FTK prescribes a funding policy based on the average coverage over the previous 12 months, rather than the previous three.

Driessen of Aon Hewitt said coverage ratios would remain under pressure as a result of “interest-limiting decisions” at the European Central Bank, the crisis in Ukraine and new discount rules for pension funds scheduled to take effect on 1 January 2015.

Aon Hewitt, meanwhile, estimated that pension funds’ liabilities increased by 2.3% in July on the back of falling interest rates.

Mercer said the average market rate for discounting liabilities for an average pension fund fell from 2.65% to 1.97% in 2014.

Van Ek added that the difference between the official discount rate and the market rate was 0.35 percentage points at July-end.

Aon Hewitt estimated that Dutch pension funds’ combined assets grew by 1.6% in July due to returns on government bonds (1.9%), equity (1.4%) and property (3%). 

According to the pensions adviser, the average scheme lost 3.1% on commodities last month.

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