NETHERLANDS - Future pension benefits for Dutch workers could be affected if interest rates stay low and markets do not recover, pensions regulator De Nederlandsche Bank has claimed.

As an example of difficulties the country could face, DNB pointed at developments in Japan, where long-term interest rates have steadily decreased to under 2% since the early 1990s.

"If this happens, pension funds' cover ratios will decrease to under 70% on average," the watchdog said in an overview of financial stability in the Netherlands.

In contrast, however, the funding ratio could quickly recover if interest rates go up, stated DNB, as a rise to 5% will lift the average pension fund out of a position of underfunding.

According to the regulator, the important difference between the present situation and the developments in Japan is that Japan waited a long time before it started to clean up the balance sheets of its banks.

"Moreover, it was not clear for a long time that the solvency of life insurers in Japan had dropped sharply," added DNB.

"As liabilities are now marked-to-market, a decreasing cover ratio is immediately visible and corrective measures can be taken more quickly," the regulator noted.

DNB suggested pension funds could decrease their susceptibility to market sentiment by, for example, increasing the duration of their fixed income investments.

The watchdog also noted despite the decreasing markets, pension funds divested no less than €10bn of equities during the last quarter of 2008.

"As a consequence, the schemes were not able to play their usually stabilising role, in which they buy equity during falling markets and sell when markets rise," DNB explained.

On the other hand, life insurers invested almost €5bn in equity during the last quarter, despite selling 25% less products in the same period, according to the regulator.

DNB also announced life insurers have decreased their equity investments by two-thirds since the end of 2006.

The regulator attributed this phenomenon not only to decreasing markets, but also to a shift from investments in listed equity to tradable securities.

At the end of the first quarter, the life insurers had invested €131.6bn in tradable securities, compared to €111bn a year earlier, according to DNB.

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