NETHERLANDS - Social affairs minister Piet Hein Donner has granted Dutch reinsured pension funds additional leeway in the time they have to submit a recovery plan, to help them avoid cuts in pension rights.

Reinsured scheme now have until 31 December 2010 to present a recovery plan under certain circumstances, rather than 1 April as initially required, Donner said in a letter to the Dutch Parliament.

The minister said his decision comes after the European Commission decreed a reinsured pension fund is considered to have a solid position as a creditor, in the case of an insurer's collapse.

The key detail relates to the creditworthiness of the insurer and its impact on the rules governing funding requirements. Pension funds which have reinsured their risks with an insurer have in recent months been faced with a decreased creditworthiness of their insurer, following the financial crisis.

Many reinsured schemes already face a funding shortfall. Yet the Dutch Pension Act requires increased funding of the pension fund to shore up any shortfall in the cover ratio at the same time as the market value of a scheme's claim on the insurer has also decreased. So if an insurer's credit rating is cut in any way, the amount a pension fund holds in assets also has to increase.

Any pension fund in such a position was required to file their recovery plan before 1 April, and therefore faced the need for a cut in benefits and pension rights, despite an insurer's full compliance with its obligation to pay, explained Donner.

The minister said he intends to allow reinsured schemes a longer exemption for recovery plans through an Order in Council.

During this period, schemes will also be allowed to act as if there were no shortfall from the reinsured part of their arrangements, as long as these are related to credit risk, added Donner.

Meanwhile, his department will investigate the future of reinsured schemes and look at, for example, the conditions under which an insurer can add value to a pension plan, as well as how the risk of an insurer's collapse could be managed.

The results should lead to a decision later this year on a "fundamental and structural solution" on reinsured pension funds, Donner suggested.

Most reinsured pension funds are company schemes and approximately 80 schemes have fully reinsured their risks, according to the Foundation for Company Pension Funds (OPF).

"Because of those arrangements, the schemes are exempted from having financial buffers," noted Frans Prins, OPF's director. "Their contribution was expected to buy them full cover."

Recovery of an underfunded reinsured scheme could be reached through extra donations from the sponsoring company, Prins suggested.

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

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