More Funding Pain for Dutch Pensions

(May 2, 2012)  —  An equity market downturn and a change to the rate against which liabilities are measured pushed the average Dutch pension funding ratio down to 99% in April, data has shown.

The funding ratio fell one percentage point last month, according to the Aon-Hewitt Pensions Thermometer, taking it even further from the 105% minimum rate dictated by the Dutch National Bank.

A ‘perfect storm’ of poorly performing equity markets, a fall in the ‘swap-rate’, and further pressure on the euro against other major currencies impacted pension funds in April.

Aon Hewitt said: “The so-called ‘swap rate’ fell in April for short maturities of one year by 0.11 percentage point. For maturities of thirty years, the decline was 0.05 percentage point. Stock markets turn down the first negative monthly return since September 2011 and decreased by 0.53%. Commodity markets rose in April by 0.1%. The euro fell 0.8% against the US dollar. ”

The swap rate is the figure pension funds in the Netherlands use to measure liabilities. In the past year and a half it has fallen considerably. In January, aiCIO travelled to the Netherlands to take the temperature of the Dutch pensions industry.

At the start of 2011, these rates were around 4%, which was already not an easy level. Now, CIOs must deal with rates just over 2%. This assumes that some of the most sophisticated risk managers and asset allocators in the world will make an investment return that doesn’t even beat inflation.

As a result, many pension funds have had to make plans to cut member benefits in the coming years to try and stem their burgeoning liabilities.

In February, 80 pension funds announced they would be reducing benefits in an effort to recover the minimum 105% funding ratio. These funds included ABP, the largest Dutch fund catering for the country’s civil service. ABP was 94% funded at the end of December, compared with 140% in 2007, before the financial crisis.

A series of poor industrial output figures from the Eurozone released today show there is likely to be no let-up in the pressure on the region.