NETHERLANDS - Recovery plans at Dutch pension funds could come up short if swap rates and equity markets fail to recover sufficiently, Mercer has warned.

If neither swap rates nor markets improve, Dennis van Ek, actuary and principal at the consultancy, said the daily coverage ratio and the average three-month funding would be at 92% after just three months.

"However," he added, "the recovery plans are based on the situation at the end of 2008, when the coverage ratio was 95% on average."

According to Van Ek, the 30-year swap rate - the criterion for accounting liabilities - has dropped from 2.4% to 2.2% in just a week, due mainly to developments in Greece.

Pensions adviser Aon Hewitt, employing a slightly different accounting method, said it had reached similar conclusions to Mercer.

It estimated the current coverage ratio based on the three-month average at 97%, 1 percentage point higher than Mercer's estimate.

Tim Monten, financial risk manager at the consultancy, said: "Following the three-month average of the forward curve, the coverage ratio has dropped by 2% on average during the past two weeks. However, this would have been 5% if the daily swap rate would have been applied."

Mercer's Van Ek attributed the steep drop in rates to investors' flight to safe-havens.

"Thanks to the uncertainty about Greece and the euro-zone, both the markets for equity and euro-denominated bonds are decreasing, resulting in investors swapping their equity for their national government's paper," he said.

"Currently, we are seeing dropping government rates in the UK, the US and in Japan, whereas investors in the euro-zone are switching to government bonds of the highest rated countries - Germany in particular."

According to Van Ek, not only pension funds but also many banks and insurers from across Europe are taking refuge in 'secure' government bonds.

"As a result, the interest on German government paper dropped to 2.07% for a short while on Monday," he said.

Following the rate drop, many pensions funds with an extensive interest hedge are now considering to cash in on at least part of their cover of swaps and long-term government bonds, the actuary stated.

"Schemes with a strategy to cash in are now considering to lower the trigger level - from 2% to 1.5%, for example - because they are taking into account that the long-term rates can fall further, possibly to even 1%."

According to Van Ek, two Mercer clients have already cashed in by selling part of their hedge, as part of an incremental divestment plan in the event of a further rate cuts.

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