The rate effect: Dutch pension fund coverage ratio drops
Following the Dutch Central Bank (DNB) adjustment of ultimate forward rates (UFR rates), the average coverage ratio for Dutch pension funds declined from 108% to 104% throughout July, pension advisor Aon Hewitt reported.
In July DNB announced the reduction of its UFR rates from 4.2% to 3.3% as of 15 July, in a bid to achieve a more realistic determination of the actuarial interest rate used by pension funds.
A coverage ratio of 100% means that Dutch pension funds will just about be able to comply with their payment obligations, however, according to Dutch pension legislation, a coverage ratio below 105% already constitutes a shortfall.
In addition to the decline of UFR rates, market rates also declined, further increasing the volume of outstanding obligations. Throughout the month of July, the volume of outstanding obligations for Dutch pension funds increased by 7.1%, as Aon Hewitt reports. Further, the average value of pension fund’s invested assets increased only gradually, at 2.9%.
Aon Hewitt also warned that since the UFR is based on the average rate over a ten year period, the UFR rate is expected to decline to 1.8%. “This would continue to delay the improvement of pension fund coverage ratios and could lead to an increase of pension contribution as well as more stringent pension regulation” comments Frank Driessen, chief commercial officer Retirement & Financial Management at Aon Hewitt.