(January 19, 2012)  —  Dutch pensions giant ABP is implementing a temporary contribution hike and mulling cutting benefits to its members as it reveals a funding shortfall of over 10 percentage points.

The fund for Government workers and education staff revealed today that it had only a 94% coverage ratio at the end of 2011, against a minimum regulatory level of 105%. At the start of the year, the fund had reached this requirement, even moving up to 112% by the end of June.

Henk Brouwer, Chairman of ABP, said it was unfortunate that these measures needed to be taken, but the coverage ratio of the fund was too low to avoid them.

Brouwer said: “This means that the premium goes up. The temporary surcharge on the premium ranges from 1 to 3%. Reducing the pensions by about half a percent in 2013 has now become a real option.”

The premium – or contribution – is split 70-30% between the employer, the Dutch Government and participants. ABP will take the final decision on whether to cut members benefits on February 1. Benefit cuts would take effect in 2013.

Brouwer said: “We can imagine very well that our participants will be disappointed by this. A decision to decrease the pension claims or rights, however limited, is a measure we take when there is no other option. At the end of the year we draw up the balance sheet and then we will know whether the claims and payments indeed need to be decreased in April 2013.”

ABP said its assets had risen €9 billion from €237 billion to €246 billion over the 12 months.  This was due to a 3.3% investment return, including the effect of an interest rate hedge. This meant the fund has made an annualised 6.9% return since 1993. The fund’s assets are managed by APG, which was an in-house asset manager for the fund until 2009.

Given this upturn in the fund’s assets, the slippage in the coverage ratio was therefore due to a rise in liabilities. In the 12 months to the end of 2011, ABP’s liabilities rose by €36 billion from €225 billion to €261 billion, it revealed today.

Interest rates against which pension schemes liabilities are measured have been brought down as a direct result of the financial crisis in the Eurozone.  

ABP, along with the other Dutch funds, has to use a rate of 2.7% set by the Dutch National Bank – which is based on a three month average – against which to discount liabilities. This rate is lower than a year ago, meaning liabilities have been increased against assets that are stated on a mark-to-market basis. At the end of 2010, the discount rate was 3.5%.

ABP is one of the funds advocating a longer period against which to measure liabilities. Its statement today said: “The fund supports averaging the market rate for a period of one year.  ABP will again argue for the this view in its submission of the recovery plan for evaluation by the DNB.”

In November 2010, ABP had already announced it would increase the premium it demanded from employers and members by half a percent and frozen member benefits payments as its coverage ratio had slipped below the required minimum.

Estimates at the time suggested that a rise of 1% would add more than €200m to the government’s wage bill.