New rules for the valuation of AAA bonds in the Netherlands would result in a smaller increase in Dutch pensions funds’ required financial buffers under the new financial assessment framework (FTK), actuaries have claimed. 

Until recently, Dutch schemes had assumed that the FTK – which will come into force on 1 January 2015 – would increase the mandatory buffer from 121% to 126% on average, following a new risk-based accounting method.

However, at the request of Parliament, Jetta Klijnsma, state secretary for Social Affairs, has now removed the initial risk surcharge on AAA government bonds, including Dutch ones.

Mark van de Velde of consultancy Aon Hewitt estimated that the adjustment would lead to required buffers of approximately 124%.

“However, what matters is the proportion of government paper in the portfolio,” he stressed.

“If a pension fund doesn’t have many bonds and is hedging its interest risk through swaps, the impact is less.

“In contrast, a conservatively investing scheme with large fixed income holdings will face a much larger effect, of 4-6%.”

For pension funds that have deployed swaps to hedge their interest risk, the effect would be between 0.5% and 1%, estimated Agnes Joseph, an actuary at Syntrus Achmea.

She added that the largest effect found was 3.5%.

In her opinion, the funding level under which pension rights must be discounted – estimated at 92% on average – should be reduced by an equal percentage.

This critical level is the coverage ratio pension funds must have at the start of 2015, in order to achieve the required financial buffers within 12 years.

Pension funds with a lower funding must cut pension rights (incrementally if the prefer).

However, the critical funding level is higher for pension funds with a conservative investment policy.

That said, Van de Velde said he doubted whether the critical level would drop in line with the required buffers, “as pension funds are not allowed to have a funding of less than 105% for five consecutive years”.

“We expect the amendments to the rules will result in the obligation that a pension fund must show it can always improve its coverage to 105%,” he said.

“Our calculations show this is impossible for a funding of 92%.”

Van de Velde went on to explain that pension funds also must consider the negative impact of the new ultimate forward rate in their calculations for their recovery potential.

“Even if the market rates remain unchanged, the discount rate for liabilities will decrease over the coming years, resulting in a slower recovery,” he said.

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