NETHERLANDS - The cover ratio of the average Dutch pension fund rose to 107% by the end of August, after reaching an absolute low of 90% in early March, consultancy firm Hewitt Associates has claimed.

The improved average funding ratio is now 2% over the minimum cover required by pensions regulator De Nederlandsche Bank (DNB).

"Although individual pension funds are performing better or worse, the average scheme is in much better shape than was deemed possible half a year ago," commented Arnold Jager, consultant at Hewitt.

"If the pension funds manage to continue this trend during 2009, some schemes might even start considering paying compensation for inflation," he added.

Hewitt is monitoring the potential cover ratio of a fictitious pension fund, based on figures of DNB and investment data provider the WM Company.

That said, despite a rise in the security markets of almost 4% in August, decreasing long-term interest rates have kept the funding ratio of the average pension scheme at the same level as at seen the end of July, Hewitt figures suggest.

Pension funds need to calculate their liabilities according to the interest swap-based forward curve for long-term interest rates set by DNB.

However, investment conditions have yet to return to normal, in Jager's opinion. He believes long-term interest rates, especially those with a duration of approximately 15 years, are still decreasing because there is still a lack of liquidity in the markets.

"The interest rate on government bonds is still 0.2% higher than the forward curve for pension funds, and is even increasing. If pension funds use the rate on these safe bonds, their funding ratio could be 5% higher," argued Jager.

"It is ironic that some years ago the pensions sector considered government bonds, with their relatively low returns, as too safe and therefore less attractive for generating returns," continued the consultant, who noted that even the returns on government bonds show signs of volatility nowadays.

A government-appointed committee is now working on a review of the parameters of the financial assessment framework FTK for pension funds, looking in particular at the investment returns which schemes may use for their predictions.

As interest rates are a major trigger for the volatility of pension funds' cover ratios, the committee's report is expected to include advise on the forward curve.

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com

Topics