NETHERLANDS - The funding ratio of the average Dutch pension fund is likely to drop by 5 percentage points over the course of June.

Approximately half of the decrease results from the fact pension funds no longer value liabilities on the basis of the market swap rate, but instead use a three-month average as prescribed by the regulator.

Dennis van Ek, principal at Mercer, said: "The three-month average interest rate will by the end of this month have declined by around 15 basis points, resulting in an average decline of funding ratios by 2.5%."

In addition, the market rate has risen a bit, causing the value of bond portfolios to decline, while equity markets have also slightly gone down.

"Altogether, this results in 5 percentage points lower solvency rates for the average pension fund," according to Van Ek.

The funding rate of the €260bn public servants and teachers scheme ABP- which stood at 92% at the end of May - would by this reasoning dip to just 87% at the end of June, well below the rate of last month.

This means the pension giant will have fallen even further behind its recovery plan, and the likelihood of benefit cuts has increased accordingly.

The €116bn healthcare scheme PFZW can expect a funding rate of around 92% at month-end.

The €29.6bn metal workers scheme Metalektro can expect its funding rate to drop from 92.9% at the end of May to 88% by the end of June, while its much larger sister scheme PMT (€44.6bn) can expect a decline from 88.8% to just 84%.

According to Van Ek, if interest rates remain about the same, funding levels will deteriorate further.

"If interest rates don't change, solvency rates will go down by another 2 percentage points because the three-month average discount rate will continue to decline," he said.

However, the damage for ABP may be limited. ABP does not publish its solvency rate until 19 July, but spokeswoman Jos van Dijk emphasises that the scheme has only hedged about 25% of its interest rate risk.

"This leaves us more vulnerable when interest rates decline, but when rates rise, we benefit more strongly than the average scheme," she said.  

However, even if ABP's funding rate at the end of June will have dropped by "just" 2.5%, rather than by the full 5 percentage points, the news is still not good.

And ABP is not happy, according to Van Dijk.

"To avoid having to implement benefit cuts in 2013," she said, "the scheme must achieve a funding rate of about 100% by the end of the year."

If it cannot achieve this objective and falls too far behind, the scheme might even have to announce additional cuts for 2014.

Van Ek said there was "plenty of reason to worry", warning that pension funds on average would have a lower funding ratio this year than at the end of 2008, when the current recovery plans were first drafted.

"At the end of 2008, funding levels stood at 95%," he said. "The average scheme dips below that level now."

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