Dutch Central Bank gives pension funds 12 years to recover

[AMSTERDAM] The Netherlands' Central Bank on Tuesday gave Dutch pension funds, which include some of the largest in the world, 12 years to rectify low funding ratios.

In the past, funds had been required to repair their funding ratios - their current estimated assets compared with their estimated future obligations - within three years by cutting pension payouts and increasing premiums. But the central bank said neither would be necessary.

The longer recovery plans will allow 154 troubled funds to restore their solvency gradually and "almost entirely from expected returns on investments." It did not name the funds.

Dutch funds are considered under stress when their coverage ratio falls below 104 per cent; they are only allowed to increase pension payments to match inflation once their coverage rate returns to above 110 per cent.

An analysis by Aon Hewitt published last month found that the coverage ratio of the average Dutch fund was 104 per cent at the end of July.

The largest Dutch fund, ABP, with more than 300 billion euros (S$475.4 billion) of assets under management, reported a coverage ratio of 100.9 per cent as of July 31.

The DNB announcement comes seven years since the onset of the financial crisis, after the central bank completed a review of recovery plans for funds that needed to restore their funding ratios. Roughly two-thirds of Dutch pensions are under stress, in a system considered one of the most robust in the world.

In July, the central bank announced it would measure pension liabilities more strictly than required by European rules, by assuming that interest rates will remain low into the distant future.

The Aon Hewitt analysis estimated that coverage ratios at Dutch pensions fell by about 4 percentage points as a result of the change.

But Tuesday's announcement of the results of the DNB review show the central bank is not taking a hard line on the other side of the equation, expected returns. It is allowing funds to calculate a return of 7 per cent on equities and a 4.7 per cent overall average return.

"A number of mostly larger funds are choosing to assume this maximum allowed return on investments," the bank said in a statement.

"Whether this return will actually be achieved is of course dependent on development in the markets."

REUTERS