PVK rules ‘leave Dutch funds short’

Dutch companies could end up having to add e15bn a year into their pension schemes to meet the guidelines set by Dutch pensions watchdog PVK, says Dexia Securities.
Weak equity market performance has eroded Dutch pension fund reserves as a percentage of their liabilities, falling from an average 140% in 1999 to 106%. Dutch pension funds hold an average 38% of their investments in equities, and with the Dutch equity index, the AEX, now down at around 350, more than 200 funds are estimated to have insufficient reserves to cover their commitments – amounting to a shortfall of e10bn.
The startling deterioration of coverage ratios has led PVK to issue guidelines to the Netherlands’ 1,000 pension funds, asking them to ensure a funding level of 105%, but, say the authors of Dexia’s report ‘Pension Watchdog Bites’, “to meet the new buffer requirements in the next two to eight years, pension funds will require new assets to boost their coverage rations.
“E15bn of additional annual funding in the period 2003–10 will be required, implying a total additional funding of e130bn over the next eight years,” says the report. The AEX needs to rise more than 35% to 475 to make up the shortfall.
Companies likely to find themselves underfunded as a result of the buffers include household names such as ABN Amro, Ahold, Heineken and Philips.
The report further draws attention to the macro-economic impacts of the PVK’s guidelines. Dexia suggests that if stock markets remain flat or increase, the buffer requirement of 10% at the current low levels will eventually be replaced by the requirement to hold reserves of 40%.
Consequently, for most pension funds it will become increasingly attractive to invest in asset classes with lower buffer requirements. This implies that a greater percentage of the Dutch pension funds will become net sellers of equity as soon as share prices recover and they increase their exposure to fixed income.
Also suggested is the decline of property investments as a percentage of total investment. As property returns have been remarkably good in comparison to general equity returns, a reduction in property exposure will reduce the need for additional reserves.
Although Dutch pension fund participants have welcomed the address of the underfunding issue, PVK’s guidelines have been criticised for being unrealistic. The main fault, agree many onlookers, is that the time limit is too short, and that funds need a longer transition period. If stock markets do not recover, schemes may be forced to up their premiums, which could trigger as drastic a change as the Dutch pension system converting from defined benefit to defined contribution.

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