Coverage ratios at Dutch pension funds fell by another 2-3 percentage points in February, after having already fallen by 5-6 percentage points the month previous. 

Mercer and Aon Hewitt, however, said funding ratios had rebounded slightly from a dip in mid-February, when equity markets declined sharply.

Mercer calculated that the average coverage ratio at the end of February stood at 96%, while Aon Hewitt, employing a slightly different methodology, placed the ratio at 94%.

Mercer attributed plummeting ratios chiefly to the low-interest-rate environment.

It noted that the 30-year swap rate – Dutch pension funds’ main benchmark for discounting liabilities – fell by 25 basis points to 1% in February.

The consultancy also cited the impact of falling equity markets.

Mario Overduin, senior associate and investment consultant at Mercer, said: “Although the large losses of mid-February have been largely made good recently, the MSCI World Index has decreased 1% on balance.”

The MSCI World Index, following a 6% drop in January, fell by 8% by mid-February.

According to Aon Hewitt, the average Dutch real estate portfolio lost approximately 6% last month, while fixed income portfolios returned 5.4% on average over the same period. 

Mercer estimated the overall average investment return at 1.5%, Aon Hewitt 1.9%.

Both consultancies saw pension funds’ official ‘policy coverage’ – the current-funding average over the previous 12 months, and the main criterion for rights cuts and indexation – decrease by 1 percentage point on average.

Mercer placed policy funding at 103%, Aon Hewitt 102% as of the end of February.

Most Dutch schemes will need to start discounting pension rights if their current coverage ratios fall below 90% at year-end.

Under the new financial assessment framework (nFTK), however, schemes can apply the discount over a 10-year period.

Frank Driessen, chief commercial officer for retirement and financial management at Aon Hewitt, said: “If conditions remain unchanged and the funding is still at the current level at year-end, it is inevitable a number of pension funds will have to apply rights cuts next year.

“We expect pension funds will soon provide clarity about this.”

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