The combination of volatile stock markets and falling interest rates is having a dramatic impact on the coverage ratio of Dutch pension funds. 

During August, the average funding has already dropped 5 percentage points to 101%, according to pensions adviser Mercer.

Dennis van Ek, actuary at the consultancy, described such a rapid decline over such a short period as “extreme”.

Aon Hewitt, which uses a slightly different accounting method to calculate its average funding rato, even claimed a larger funding drop.

According to Mike Pernot of Aon Hewitt, the average coverage ratio had already fallen 5 percentage points by last Friday, and the declining stock markets since have added at least a further 2 percentage points.

At July-end, the consultancy concluded that funding stood at 104% on average, which would imply that the current coverage would be no more than 97% on average.

The minimum required funding of Dutch pension funds is 105%.

Van Ek of Mercer said that on Monday the MSCI World Index and the MSCI Europe Index had fallen 14% on average since the start of August.

Equity holdings of Dutch pension funds are roughly equally divided across Europe and the rest of the world.

The pensions adviser further said that the 30-year swap rates – the relevant rate for discounting liabilities – had dropped from 1.50% to 1.44% in August.

He added that many pension funds were making inquiries about developments. Schemes with a liability-driven investment (LDI) policy in particular, were asking for advice on the level required for their interest hedge, Van Ek said.

According to Mercer, the average funding of pension funds has dropped 8 percentage points since mid-July.

Mercer bases its funding calculations from the most recent reports by De Nederlandsche Bank, examining the asset allocation of funds and their level of interest rate hedging – currently approximately 40% – and uses a currency hedge of 50%.

Aon Hewitt assumes an asset allocation of 30% equity, 50% fixed income and 20% alternatives. It uses an interest hedge of 50%, but does not calculate the potential impact of hedging currecy exposure.

Its model is also based on a hypothetical pension fund where one-third of the total number of participant is retired.

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