Dutch pension funds remain vulnerable as their recovery plans rely too much on expectations of high future returns, supervisor De Nederlandsche Bank (DNB) has warned.

After assessing the 2017 recovery plans of 181 schemes, it concluded that pension funds’ expectations for surplus returns have turned out to be too optimistic over the past two years.

The watchdog found that pension funds had factored in an annual funding rise of 4.4 percentage points on average as a result of extra returns.

During the past two years, however, the expected recovery has not materialised, with funding ratios of recovering schemes staying almost unchanged at approximately 100%.

Based on the schemes’ recovery plans, the funding level should have been 7.8 percentage points higher.

If coverage ratios stay at their end-2016 level, 11 pension funds with 2 million participants will need to apply rights cuts in 2020, according to the regulator. The following year, 45 schemes would have to discount pension rights for 8 million participants.

Funding has increased in 2017, however, with coverage ratios standing at 105.4% on average in April.

DNB said that as things stand at the moment, no more than two pension funds, with 13,000 participants in total, must cut pension rights this year.

In a clarification of the recovery plans’ assessment, Frank Elderson, DNB’s supervisory director for pension funds, acknowledged that pension funds had stayed within the legal limits for their assumptions for returns.

“Our message to the pension funds, however, is that they must be transparent about their assumptions to their participants,” he said.

In Elderson’s opinion, it would not be useful to reduce the legal parameters for return expectations because of the expected introduction of a new pensions system within a few years.

When asked, the supervisory director declined to indicate what would a prudent return assumption would be.

In 2014, a dedicated parameter committee advised that expectations for returns from listed equity, triple-A rated government bonds and credit should be no more than 7%, 2.5% and 3%, respectively.

It said non-listed real estate and commodities should be expected to return at most 6% and 5%, respectively.

DNB is in the process of conducting a second survey about the way pension funds explain the possibility of rights discounts.

Last week, Belgian supervisor FSMA said that Belgian pension funds’s assumptions for future returns were too high, and that it would get in touch with these schemes.

 

 

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