Despite Position as LDI Frontrunners, Dutch Pensions Suffer Severe Drop in Funding

(September 23, 2011) — Dutch pension funds — one of the first to embrace liability-driven investing (LDI) following strict regulations requiring greater funding levels — have witnessed an 11% drop in funding.

According to De Nederlandsche bank (DNB), the Dutch pension regulator, the decline in funding ratio from March to August has been a result of poor market performance and rising interest rates. The average funding ratio of Dutch pension funds has fallen severely from 112% as of March of this year to 101% at the end of August.

The regulator explained that the deterioration of the funding level – the ratio of available assets to liabilities – was a result of a decline in equity prices as pension funds’ liabilities increased due to a drop in long-term interest rates.

“During the period between end-March and end-August, the Amsterdam Exchange Index (AEX) declined by 19.9% and the MSCI World Index by 10.8%. The decline reduced the value of pension funds’ available assets, directly affected the funding ratios. A positive return on fixed-rate asset portfolios could not compensate the loss,” DNB stated.

Consequently, many pension funds currently face funding deficits, defined by the Dutch regulator as a funding ratio below 105%. Pension funds facing a funding deficit are required to submit recovery plans to DNB to be evaluated in early 2012.

At the end of August, 207 Dutch pension funds, totaling 4.7 million active members and 2.1 million retirees, had funding deficits, according to the regulator. Comparatively, at the end of March, 94 pension funds numbering 1.2 million active members and 0.6 million retirees had funding deficits.

DNB’s remarks follow a report released earlier this month by LCP Netherlands that showed Dutch pension deficits increased in 2010 and new IAS19 accounting rules are likely to heighten Dutch companies’ pensions liabilities even more.

LCP warned that the International Accounting Standards Board’s (IASB) new accounting rules, to be introduced in 2013 – which change the way pension scheme assets are valued by using mark-to-market accounting on the assumption that this is more transparent – will have a major impact on companies’ reported profits and would have lowered profits by €1.5 billion if applied for 2011. The firm noted that as well as lower headline profits for companies, current pension disclosures will be insufficient under the new version of IAS19.