Aon Hewitt: Dutch Pensions ‘Are Not Out of Danger’

(February 4, 2014) — Dutch pension plans’ funding ratios are back on track, with the average reaching 110% by January 31, 2014, according to data from Aon Hewitt.

The ratio reflects just a single percentage point growth from the funding level in December 2013. Liabilities also rose in January by about 0.6 %, driven by a slight decline in the three-month average rate.

While some of the largest pension funds have taken the opportunity over the past few weeks to announce they would no longer have to cut benefits, Aon Hewitt has argued that the landscape for Dutch funds remains fragile.

Some of the largest funds, ABP, PFZW, and BPF Bouw all exceeded their minimum funding target in the first month of this year. ABP revealed last week that its funding ratio had increased to 105.9%, 1.7% above the required minimum. It has brought to an end a 0.5% reduction in pensioner payments, introduced last year, as a result.

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BPF Bouw reported a 111.6% funding ratio for the end of 2013, and PFZW even suggested the recovery to its assets could result in an increase in pension payments by almost 1%.

PMT has not, as of today, reached its minimum funding level, but has nevertheless said that it won’t introduce pensioner payment cuts, because it hit the required coverage level in the middle of January.

PME, the other of the Netherlands’ five major pension funds, has also yet to meet its minimum funding target.

Despite this generally good news, there are still 38 pension funds required to cut their payments to pensioners, according to the Dutch regulator, De Nederlandsche Bank.

Frank Driessen, chief commercial officer for retirement & financial management at Aon Hewitt, said those 38 funds highlighted by the DNB would come under pressure to reduce pensioner payments from April 1, 2014.

He also warned that Dutch pension funds as a whole were still in dangerous territory. “The recovery of pensions is fragile. Many funds are largely exposed to equity risk and partly to interest rate risks,” he said.

Total assets also increased by 1.2% on average in the past month. Bond prices rose by an average of 3.6%, driven by the decline in market interest rates. Equities, however, underperformed in January by 2%, with emerging markets being hit particularly hard.

(February 4, 2014) — Investors who took a punt on relatively risky fixed income over last five years would have notched up the best possible risk-adjusted returns for their portfolios, research has shown.

US and European high-yield had the best performance, on both an excess return and Sharpe ratio basis in the five years to the end of 2013, consulting firm Redington found.

US high yield returned 18.2% overall with a 2.05 Sharpe ratio, while its Europe-issued counterpart made 21.1%, but with a slightly worse Sharpe ratio of 1.77.

The next best performer on a risk-adjusted bases was US leveraged loans. This category of fixed income made 13.1% on an absolute basis with a 1.68 Sharpe ratio.

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“Over a five-year period, US high yield has been the top performing asset class on a risk-adjusted basis over the last three quarters with a Sharpe Ratio of 2.05 in Q4,” a note from Redington said. “European High Yield has produced the highest excess return for the same three quarters with an excess return of 21.1% in Q4.”

One asset class has been underperforming for longer than these have outperformed.

“Hedge Fund – Macro has been the only asset class to consistently offer a negative excess return over the time horizon, having done so now for six successive quarters,” Redington said.

The sector finished off the five-year period with a 4.1% loss.

Over a three-year period, the top two performers maintained their positions, being followed by risk parity, which made an 8.2% excess return, with a 0.91 Sharpe ratio.

Looking at the past year, however, developed market equities have cantered past fixed income securities, making 26.4% over 2013 with a 2.89 Sharpe Ratio.

To read the full research note, click here.