Twelve Dutch pension funds are likely to cut pension rights next year, based on their current policy funding ratio, according to regulator De Nederlandsche Bank (DNB).

DNB said that the number of schemes with a policy funding ratio of 95% or less had doubled during the first quarter of the year. The policy funding ratio is the average of the day-to-day coverage during the past twelve months.

The topical funding ratio, the scheme’s actual funding ratio, is usually several percentage points below the policy funding ratio.

Separately, Mercer predicted that funding levels were unlikely to improve over the short-term, with recent weeks seeing a renewed decline in funding ratios after modest improvements.

Pension funds with an actual funding of approximately 90% are unlikely to avoid rights cuts, according to the DNB, as they will not be able to recover to the required level – between 110% and 125%, depending on a scheme’s asset allocation – without cuts over the next ten years.

With a policy funding ratio of 95% and a topical funding ratio of 88.9% at the end of March, the €172bn healthcare scheme PFZW is the largest pension fund facing a rights cut.

Agrarische en Voedselvoorzieningshandel, the industry-wide scheme for the agricultural workers, and Tandtechniek, the pension fund for dental technicians, reported a policy funding ratio of 92.8% and 87.5%, respectively.

Underfunded company schemes on DNB’s list include the pension funds of the automobile association ANWB (94.6%), brewery company Bavaria (93.9%), IT firm CapGemini (94%), charcoal manufacturer Norit (91.9%) and the scheme for employees of pensions provider MN (95%).

The pension fund for midwives, with a policy funding ratio of 90%, had already indicated that it might even have to apply rights cuts this year.

Many pension funds are preparing their beneficiaries for possible rights cuts.

‘Gloomy’ outlook

The industry-wide scheme for the agricultural and food trade said that cuts may be needed next year if interest rates remained low, describing the prospects as “gloomy” in a newsletter for beneficiaries.

Decreasing long-term interest rates, combined with declining equity markets, have recently caused day-to-day funding to drop 3 percentage points, reaching an average of 95% in June, according to Mercer.

It said that the 30-year swap rate – the main criterion for pension funds’ discounting liabilities – had decreased 16 basis points to this year’s lowest level of 0.94% during the first two weeks of June.

The consultancy also noted that the MSCI World Index had fallen 2% during the same period.

Dennis van Ek, actuary at Mercer, said that funding would have dropped by up to 4 percentage points at pension funds with a low level of interest rate hedging in June.

Schemes with a significant level of interest rate hedging, however, saw their funding decline by approximately 2 percentage points.

At May-end, Mercer estimated the average pension fund’s coverage ratio stood at 98%. 

Aon Hewitt, which uses a slightly different calculation method, said funding was 97% on average at the end of last month.

Mercer’s van Ek said that the market expected that, in case of a Brexit, the ECB would step up purchasing government bonds and further decrease short-term interest rates.

The actuary added he was not yet able to indicate how much the ECB’s corporate bond purchasing programme had affected the decline of interest rates, but added that the market seemed to not to have fully priced in the effect yet.

Last week, the ECB started to buy corporate bonds as part of its monthly €80bn purchasing programme.

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