Four of the five largest pension funds in the Netherlands are still facing rights discounts next year, as the impact of falling interest rates, the criterion for discounting liabilities, by far outstripped first-quarter returns.

Although interest rates and equity markets recovered slightly in March, funding ratios have fallen by up to 7 percentage points on balance.

ABP, the €359bn pension fund for Dutch civil servants, increased assets by €8bn after reporting a Q1 return of 2.2%.

The scheme’s liabilities, however, increased by more than €36bn over the period.

As a result, ABP’s coverage ratio fell by almost 7 percentage points to 90.4%. If the ratio falls below the 90% mark, ABP will be forced to cut pension rights. 

Corien Wortmann-Kool, the scheme’s chair, said the possibility of a cut was still “very real” and that indexation was “very unlikely for the next five years”.

ABP attributed its quarterly performance in particular to fixed income, which returned 2.5%, with long-term government bonds and inflation-linked bonds returning 9% and 2%, respectively.

Its interest, currency and inflation hedges returned 2.9% in total.

The civil service scheme, however, made a 3.4% loss on equity, with developed-market holdings falling by 4.7%.

Its investments in commodities and hedge funds also lost 5.9% and 4.6%, respectively, while property and infrastructure returned 0.1% and 0.6%, respectively.

PFZW, the €172bn scheme for the healthcare sector, reported a Q1 return of 4.4% and a drop in funding of 6.2 percentage points to 88.9%.

It produced positive returns on government bonds (6.9%) and inflation-linked bonds (2.5%), and returned 4.3% in total from its interest and currency hedges.

Local-currency emerging market debt and mortgages returned 5.3% and 2.9%, respectively.

It lost 2% on securities, however, with equity (-2.9%), private equity (-0.4%), infrastructure (-2.3%) and real estate (-0.6%) all producing negative returns.

It also incurred a 3% loss on commodities.

The €42bn metal scheme PME produced a 4.6% Q1 return, citing an 11% return for its 49% matching portfolio.

Because liabilities increased by 10 percentage points over the period, however, its funding ratio fell to 90.8% – just short of the critical level of 90%.

PME director Eric Uijen said: “We are preparing our participants for a possible rights discount next year.”

The €63bn metal scheme PMT attributed its 5.5% Q1 return chiefly to the 13.1% return of its 49% liabilities portfolio of predominantly fixed income.

Because liabilities increased twice as fast as its return, however, PMT closed the last quarter with a coverage ratio of 91.8%.

BpfBouw, the €51bn pension fund for the building sector, saw a quarterly return of €3bn wiped out by a €5bn increase in liabilities.

As of the end of March, funding at the industry-wide scheme stood at 103.9%, following a drop of 5 percentage points in the first quarter.

Chairman Jan Ruis warned that indexation would be “off the cards in the coming years”.

In the Netherlands, if at year-end a pension fund’s coverage ratio falls below 90%, it must reduce pension rights straightaway.

Under the rules of the new financial assessment framework (nFTK), however, schemes may smooth out cuts over a 10-year period.