Allowing different discount rates for pensions would 'reduce transparency'

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  • Allowing different discount rates for pensions would 'reduce transparency'

NETHERLANDS - The use of different discount rates for pension fund liabilities brings more disadvantages than benefits, as they reduce transparency in the pensions sector and are difficult to explain to participants, asset manager F&C has argued.

Responding to APG CIO Angelien Kemna's recent call for the allowance of different discount rates in order to blur counterparties' view of market movements, F&C also said pension schemes' coverage ratios would become incomparable.

The asset manager referred to the recent panel discussion at its own seminar, during which several representatives of the pensions sector advocated a uniform discount criterion, in a bid to keep the new Pensions Agreement explicable and manageable.

In F&C's opinion, Kemna's suggestion to make the discount rate dependent on the average age of pension funds' participants and the matching investment profile was superfluous. 

"As the average interest curve has a positive steepness, the old pension funds already have a lower discount rate than younger schemes on average and therefore don't have the need for a complicated and non-transparent methodology," the company said.

The asset manager added that the complaints about low funding ratios following falling interest rates were not balanced by positive messages about the increased value of the fixed income portfolio.

Although F&C agreed that the current interest level was historically low, it also noted that long-term interest rates had been lower than 4% for decades in the Netherlands over the last two centuries.

In response, APG spokesman Harmen Geers said the funding ratio was not meant for comparing for pension funds.

"The coverage ratio is primarily meant to measure a scheme's financial health," he said.

"Therefore, a discount criterion based on participants' age and a scheme's investment policy is a better indicator of a pension fund's health than one uniform discount method."

Geers added: "The current uniform discount rate makes movement in the €800bn Dutch pensions market too predictable for counterparties, such as hedge funds, and this comes unnecessarily at the expense of pension funds."

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