Dutch pensions regulator criticised for 'opening window during storm'

The Dutch Pensions Federation has warned that the reduction of the ultimate forward rate (UFR) for discounting pension liabilities will serve to heighten volatility within the new financial assessment framework (nFTK). 

The industry organisation said the lower rate was “at odds” with one of the key stated aims of the nFTK – increasing stability – and that it wanted to discuss the matter with Parliament and Jetta Klijnsma, state secretary for Social Affairs.

Previously this summer, the Dutch pensions regulator (DNB) caught many in the industry by surprise when it cut the UFR for pension funds from 4.2% to 3.3%.

At the time, it described the lower rate as being more “realistic, balanced, sustainable and fair”.

The Dutch Pensions Federation, however, argued that pension funds would be even more susceptible to interest-rate movements after the UFR cut, which it likened to “opening a window during a storm”.

It said the regulator’s decision to opt for a discount rate with an increased focus on financial markets was “illogical”, particularly when the European Central Bank’s quantitative easing policy was having such a strong impact on interest rates.

Klijnsma, however, has made clear that the government is not looking to mitigate the effects of low rates.

In a letter to Parliament, she said the government believed it was important that the interest rates applied by pension funds be “designed as accurately as possible”.

The state secretary’s letter accompanied a report on the impact of the nFTK, the low-interest-rate environment and the new UFR on pension funds’ financial positions.

One of the conclusions of the report was that the reduced UFR would lead to a 6% increase in the cost-covering pension contribution.

However, the actual increase in premiums is expected to be limited to 1% next year, as many pension funds already charge a contribution above the cost-covering level.

The report also concludes that the UFR’s impact on premiums will vary widely.

For most workers, there will be no changes, it say.

But it suggest that, for a small group of participants – particularly at schemes with a contribution that covers less than 80% of actual costs – increases could exceed 30%.