The average funding ratio of Dutch pension funds jumped by 5 percentage points in March to close to 120% thanks to an increase in interest rates, according to consultants Mercer and Aon.
According to Aon, Dutch funding ratios are at their highest level in more than 10 years. The main reason for the jump was a sharp increase in interest rates for the second consecutive month.
As IPE reported last week, the actuarial interest rate for an average Dutch pension fund has now exceeded 1%, for the first time since 2019. The interest rate increase translated into a reduction of liabilities of 6.3 percentage points.
Despite the “conflict in Eastern Europe”, as Aon euphemistically describes Russia’s war against Ukraine, equity markets continued to post broad gains too.
The average funding ratio over the past 12 months rose to 111%, bringing (partial) indexation closer for also the largest pension funds. Pension funds that intend to make the transition to the new defined contribution (DC) contract, will be allowed to index pensions if they have a policy funding ratio of 105%, down from the current 110%.
The conspicuous rise in funding ratios is especially worth noting since the poor financial position of many Dutch pension funds was one of the main drivers of the switch to a DC system by 2027.
“The sense of urgency to switch to a different pension contract indeed seems much lower now as funding ratios have improved so much,” said Aon Netherlands CEO Frank Driessen.
Driessen believes that the pension transition still makes sense though, noting that even the current high funding ratios only allow for a partial indexation of pensions under the existing rules.
He said: “A pension fund that has a policy funding ratio of 112% can only index a very small part of today’s very high inflation.”
It will not only be easier to index pensions in the new system because pension funds will no longer be required to maintain large buffers.
Driessen added: “We also see more possibility to hedge inflation risk. While pension funds are punished for investing in inflation-matching assets in the current system, the new system is better suited to implement inflation-protection strategies.”