ABP and PFZW, the two largest pension funds in the Netherlands, have urged the government, employers and unions to press on with agreeing pensions reform.

At the presentation of their third-quarter results, three of the country’s five largest schemes indicated that a cut to pension payouts and accrued pension rights remained a real threat in the coming years.

Corien Wortmann, chair of the €419bn civil service scheme ABP, said she could no longer explain to members that her pension fund was not allowed to grant indexation for the forseeable future, even though the economy was booming and salaries were rising.

“This should be a strong encouragement to put lots of work into a new pensions system,” she stated.

ABP’s funding has been improving in recent months and rose to 104.7% over the last quarter, exceeding the minimum required level by 0.5 percentage points.

“We are desparate for a decent pensions agreement”

Peter Borgdorff, PFZW

Wortmann said this would limit the chance of cuts next year to almost zero, but would not allow for inflation compensation for a number of years. Dutch schemes cannot grant even partial indexation until they reach a funding ratio of at least 110%.

Peter Borgdorff, chairman of the €203bn healthcare scheme PFZW, said it was still too early to exclude the possibility of cuts as the scheme’s funding stood at 101.5%, despite improving 0.9 percentage points in the third quarter.

Borgdorff echoed the view that the lack of inflation compensation was increasingly difficult to explain while the economy was running at full steam.

“Therefore, we are desparate for a decent pensions agreement,” he said.

He said PFZW planned to factor in the most recent longevity projections into its funding figures, and that this would lift the scheme’s funding by one percentage point.

Eric Uijen, executive chair of the €48bn metal industry scheme PME, said he didn’t feel confident about a further recovery in funding, which he said would require a further rise in interest rates.

His scheme’s funding improved by 0.4 percentage points to 101.8% since the end of June, but PME has to reach at least 104.3% by December 2019 to avoid applying cuts to pensioner benefits.

Uijen said that the lack of a new pensions agreement would increase the chances of a benefit reduction.

The €72bn PMT, which also covers the metal industry, closed the third quarter with a coverage ratio of 102.5%. It also warned that the possibility of cuts was still real.

BpfBouw, the €58bn scheme for the construction sector, has the strongest funding position of the Netherlands’ top five schemes with a coverage ratio of 118.7% at the end of September.

Volatility poses problems

The market correction during the first half of October – which wiped two percentage points off of Dutch schemes’ funding on average, according to Aon Hewitt – could have an impact on the chances of future rights cuts, albeit limited.

Most Dutch pension funds have around two years to recover from any funding shortfall, as their financial position at the end of 2020 is the criterion for possible cuts in 2021.

However, both PME and PMT were most at risk, said Corine Reedijk, senior consultant for asset-liability management at Aon Hewitt.

She explained that the metal industry schemes were already underfunded when the new financial assessment framework (nFTK) was introduced in 2015.

This meant that their five-year recovery plans would expire at the end of 2019, and that both pension funds would face the issue of whether or not to apply cuts by then.