Coverage ratios of Dutch pension funds could drop to below 70% if the COVID-19 crisis becomes a protracted one and turns into a credit crisis, consultancy Willis Towers Watson (WTW) has suggested.

However, if the pandemic were to be brought under control before the summer, schemes’ funding ratios could bounce back to the level of 2019-end next year, it said after assessing three scenarios.

WTW’s most optimistic scenario assumes that the virus is brought under control before July, and that government support for households and companies turns out to be effective.

A more pessimistic scenario is based on new coronavirus cases occurring in the third quarter, combined with a worldwide recession in the first three quarters, as well as a continuing low turnover for European and US companies in 2020.

In WTW’s worst case scenario, consumer confidence in exports from China recover slowly, while unemployment in Europe and the US soars and companies go bust as a result of declining financing options and credit facilities.

Also in the last case, government and central bank support policy is insufficient, leading to a slowdown of economic recovery in 2021.

The main difference between the first and the second scenarios, which both include new COVID-19 cases in the third quarter, is for how long the government and banks need to support the economy, WTW said.

“They could keep up support for three months and maybe a bit longer, but there will be a moment that they no longer can,” said Sander Gerritsen, head of investment strategy at WTW Netherlands.

“Finance and credit sources for both companies and consumers will eventually dry up, resulting in a rise of unemployment and companies going bust.”

However, he said that, even in the most positive scenario, many schemes will still be underfunded at the end of 2020.

Rights cuts

“Unless the social affairs’ minister Wouter Koolmees grants another leeway, this will lead to a reduction of pension righs and benefits at the pension funds with a consecutive funding shortfall in the past five years.”

In the scenario of a worldwide recession, coverage ratio of Dutch pension funds would have recovered to approximately 95% on average at the end of 2021, which is still about 10 percentage points short of the 2019 level.

The most extreme scenario assumes new hits on equity markets and long-term low interest rates.

As pension funds’ funding will have improved to no more than 85% on average at the end of 2021, widespread rights cuts will be inevitable without pensions reform, according to the consultancy.


Gerritsen highlighted that WTW’s estimates were surrounded by “significant uncertainties”, and indicated that the worst case scenario did not include the risk of a new euro crisis, “as southern countries could collapse under their debt”.

In order to avoid the worst impact of the crisis, much will depend on the degree of solidarity between countries, not only at European level, but also globally, he said.

He noted that WTW’s scenarios weren’t predictions, but pointed out that pension funds could use them as guidance for an investment portfolio that takes “inevitable future extreme scenarios” into account.

He added that the basis for such a portfolio is diversity, the use of the entire investment universe, as well as avoiding unrewarded risk, such as currency risk.

Gerritsen also suggested seising new opportunities, such as investing in Chinese equities and bonds, or consumer credit, including student loans and bridging loans.