Dutch funding ratios rebound after tariffs delay

The funding ratios of Dutch pension funds rebounded somewhat in the second half of April as the Donald Trump administration postponed the imposition of most import tariffs, according to estimates from Aon and Aegon Asset Management.

According to both the consultant and the asset manager, the average pension fund had a funding ratio of 116% at the end of the month. According to Aegon AM, that is still 4 percentage points lower than a month ago, but significantly higher than on 7 April when it provided an emergency update following the market turmoil after ‘Liberation Day’.

At that time, the average funding ratio had fallen to 112%, according to Aegon AM, which was mainly due to the sharp fall in stock markets in response to Trump’s announcement of ‘reciprocal’ import tariffs.

After Trump said on Easter Monday that he would postpone most of these tariffs by 90 days, stock markets rebounded and so did funding ratios.

At the end of the month, developed market equities were still down 2.4%, while emerging market stocks had lost some 3.7%. According to Aegon AM, this translated into a decrease in funding ratios of just 0.9 percentage points.

Funding ratios still fell by a total of 3.4 percentage points (Aon) or 4 percentage points (Aegon AM) because of falling interest rates in the weeks after 7 April.

This fall in interest rates by about 0.2 percentage points translated into higher liabilities and thus a decrease in the funding ratio of over three percentage points. Most pension funds are now less sensitive to interest rate declines than a few years ago, because they have often increased their interest rate hedges in the run-up to the pension transition, which sees Dutch pension funds switch from a defined benefit (DB) to a defined contribution (DC) arrangement.

Recession

Although funding ratios have recovered somewhat compared to 7 April, they are still lower than a month ago. There’s a considerable chance of a renewed decline, according to Aegon AM.

“The market is clearly looking for a new balance that reflects the new macroeconomic reality, both in terms of higher uncertainty, lower economic growth and the impact on inflation. We expect the likelihood of a recession in 2025 to have increased sharply for both the EU and the US,” said Jordy Hermanns, portfolio manager at Aegon AM.

Hermanns added: “Given the continuing uncertainty and the expected economic slowdown, we are preparing for a scenario in which share prices fall. Much will depend on how the US economy will respond to this uncertainty in the coming months.”

Due to “deflationary forces” in Europe as a result of a weakening economy and a possible increase in cheap imports from China, Hermanns also expects a further fall in interest rates.

“This could put further pressure on the funding ratios,” he said.

Many funds have (largely) hedged themselves against such a fall in interest rates by increasing their interest rate hedges. However, most funds have not (yet) hedged their equity risk.

The pension funds for veterinarians and physiotherapists, both of which will move to a DC arrangement on 1 July this year, are exceptions to this rule.

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