€5bn Dutch scheme for social security agency facing rights cuts after low returns

The €5bn pension fund for Dutch social security agency UWV is facing a rights discount at year-end, following the impact of the continued deterioration of interest rates on its liabilities.

The scheme’s coverage ratio – at July-end still 103.7% - must be at least 104.5% at the end of August, to avoid a rights cut for its 52,000 participants.

Due to the effect of the three-month average of the interest rates on its discount rate, its funding is likely to drop further this month.

If conditions remain unchanged, the average coverage ratio of Dutch schemes would to drop 3 percentage points by August-end, Dennis van Ek, actuary at pensions advisor Mercer estimated.

He added that the expected funding decrease would be less for a pension fund with predominantly older participants, but bigger for ‘young’ pension funds.

The probable rights cut is a consequence of the UWV scheme’s short-term recovery plan expiring at the end of this month.

Pensioenfonds UWV pointed out that the negative effect of falling interest rates on its liabilities exceeded the positive impact on its investment portfolio, consisting largely of government bonds.

Since the financial crisis, the pension fund claimed to have been following a “solid investment strategy, matching the risk appetite of both participants and its board”.

Thanks to this defensive approach – with 71% of its assets invested in fixed income and less than 20% in equity – the scheme was able avoid rights cuts so far, it said.

It had already increased the contribution from 19.1% to 20% of salary, and also reduced the annual pensions accrual from 2.1% to 1.67%.

The UWV scheme, which reported a 1.5% loss over 2013, further made clear that it was unable to suddenly change its asset allocation, as it was restricted due to the conditions of its recovery plan.

The three-year recovery plan was based on the assumption of an annual return on investments of 4.9%.

The pension fund has set up a new website dedicated to keeping its participants posted of the development of its coverage ratio and the expected rights discount.