The 150 Dutch pension funds that registered insufficient funding ratios at the end of 2019 all believe investment returns will suffice to close their funding gaps.

None of the funds are planning to increase pension contributions to improve their financial position, pensions regulator De Nederlandsche Bank (DNB) said yesterday.

All pension funds are currently required to make a recovery plan if their funding ratio is below the required minimum, which is based on the risk profile of their investment portfolio at the end of any given year.

The 150 pension funds concerned were required to send their recovery plans to DNB by 1 April.

The funds are supposed to reach their minimum funding ratios in 12 years’ time. This period was extended from 10 years last year to save a number of funds, notably the metal industry schemes PMT and PME, from having to cut pensions.

In their recovery plans, the pension funds have put all their cards on investment returns in an effort to avoid having to either cut pensions or increase contributions.

“Most pension funds allow for the maximum expected annual return of 5.6% on equities in their recovery plans,” DNB noted.

None of the funds account for higher pension contributions, the regulator added.

Moreover, most funds’ current pension contributions are too low to even sustain the current low funding ratios, DNB noted. All the plans received by DNB were drawn up before the coronavirus crisis caused a hit to asset prices and sent interest rates even lower.

Risky strategy

It’s a risky strategy for pension funds to bet on investment returns doing the job that has backfired in recent years. Many pension have had insufficient funding ratios since 2015, and have been doing exactly this ever since, with disappointing results.

“The realised average recovery in funding ratios since 2015 has been only 1 percentage point by 2020, compared to an expected average of 19 percentage points according to their recovery plans,” DNB noted.

The main reason for the failure of previous recovery plans was the strong drop in interest rates over the period.

As most pension funds had only hedged part of their interest rate risk, they had to use their investment returns almost completely to compensate for an increase in the value of their liabilities.

The struggle of most Dutch pension funds to maintain sufficient funding ratios in the current low-interest rate environment is the main reason behind the planned switch to DC arrangements.

To read the digital edition of IPE’s latest magazine click here.