NETHERLANDS - Pensions in payment will increase by 1.8% in 2007 and so exceed inflation, a study by the Dutch Central Bank (DNB) predicts.

Pension payments are normally adjusted yearly to offset the effects of inflation, but in recent years pension funds had coverage ratios below their required levels and inflation indexation was only implemented partially. As a result, pension payments have shown a decrease in purchasing power.

This will change in 2007, when payment increases will be higher than the price inflation during 2006, says the DNB. Overall indexation has been put at 2%.

Peter Borgdorff, chairman of the Dutch Association of Industry-wide Pension Funds (VB), commented: "Industry-wide pension funds currently focus on giving a total indexation, based on average price inflation."

In recent years, pension funds have been trying to counter negative impact of financial market developments and stricter DNB rules, said Borgdorff.
"Premiums have increased, indexation was only partial and most pension agreements have changed, largely from a final salary arrangement to a career average pension," he said.

Borgdorff expects indexation will be put into place at most pension funds, which is supported by DNB's initial assessments.

He also said that at present the financial situation of most pension funds is again at or even above the required levels.

Frans Prins, director of the Foundation of Dutch Company Funds OPF, commented: "In general, indexation will be part of pension agreements of pension funds, however, the latter have the right to adjust levels according to their own financial situation and assessments."

Indexation is provisional, which resulted in indexation not being put in place due to increased financial pressures and lower coverage ratios. "The DNB report shows that the current financial situation of pension funds is again healthy, leaving enough space to reintroduce indexation," said Prins.

This is not the case for all pension funds, he warned: "We expect that there will still be a large portion of partial indexation. But our members, corporate pension funds, are trying to give as much indexation as is possible."

At the end of March, the DNB will publish a full assessment of the pension payment developments and pension fund sectors.

Elsewhere, it appeared that Dutch pension fund's indexation ambitions have a growing impact on the inflation-linked market.

Research by ABN Amro suggests that Dutch pension funds will increasingly invest in real assets such as inflation-linked bonds as nominal cover ratios rise further.

Dutch pension funds have underlying indexable liabilities of €354bn for contributing members and €481bn for pensions in payment, and these are set to grow the report says.

Giant Dutch pension funds ABP and PGGM, two trendsetters among Dutch pension funds, have already indicated an increase in their asset allocation in inflation-linked bonds.

Also, there is a substantial assignment of mandates that include indexing / inflation-linking provisions from smaller Dutch pension funds to asset management providers.

"The bottom line is that, with roughly 95% of pension funds exposed to some sort of conditional indexation, interest in inflation-linked buying and receiving is here to stay and will only be boosted by higher nominal cover ratios," the research report says.

However, a study published today by Fidelty International warns that inflation-linked bonds are not the panacea in the current environment, in which returns can be generated from global diversification.

The study suggests that "UK investors should ignore the headline rate of inflation, which has had little impact on bond yields over the last 10 years, and focus instead on the opportunities presented by a diversified portfolio of global bonds."