Equity investments and hedges of the interest risk on liabilities have been the main drivers for Dutch pension funds’ recoveries since the onset of the financial crisis, according to pensions regulator De Nederlandsche Bank (DNB). 

Following an evaluation of more than 140 short-term recovery plans, the regulator concluded that schemes with a relative large equity allocation in addition to an interest hedge showed the strongest recoveries.

In 2009, approximately three-quarters of Dutch pension funds had to submit a five-year recovery plan, mapping out how they aimed to achieve funding of at least 105% at the end of 2013.

The DNB found that the average coverage ratio improved by 15 percentage points over the last five years and attributed the increase largely to the strength of equity markets.

However, the watchdog also noted that recoveries were limited by falling interest rates and rising life expectancy.

According to the DNB, equity markets fell by 80% between June 2007 and the end of 2008, while interest rates fell by 20% over the same period.

“Over the last five years, the equity index has returned to the initial level, whereas interest rates have fallen further,” it said, adding that the funding index remained somewhere in between.

The regulator explained that, using the typical investment mix and interest hedge in the Netherlands, changes in interest rates would have a roughly 50% impact on coverage ratios, whereas equity market changes would have a 40% impact. 

The DNB’s evaluation of the recovery plans confirmed that 30 pension funds had to apply rights cuts last April, in order to achieve the required funding of 105%.

The most recent round of discounts hit 650,000 active participants, 405,000 pensioners and more than 1.2m deferred members in total, while the weighted average of the cuts was 0.84%, according to the supervisor.

It said that one pension fund had used the option to limit last April’s discount to 7%, and that the scheme would apply an additional cut in future.

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