NETHERLANDS - Dutch social affairs minister Henk Kamp has insisted the discount rate for pension funds' liabilities should remain unchanged until there is clarity on the new pension contracts early next year.

In a letter to parliament, Kamp said abandoning the swap curve would depend on whether the new contracts took into account pension benefits already accrued.

The minister responded to an adopted resolution - tabled by Paul Ulenbelt, MP for the SP - asking Kamp to review the discount rate quickly to prevent benefits cuts caused by low long-term interest rates.

Because the swap curve is the criterion for pension funds to discount their liabilities, the coverage ratio of many schemes has dropped below the required minimum funding of 105%, causing the prospect of large-scale benefits cuts.

According to Kamp, a quick change of discount rate will not help the most strapped schemes, as their coverage ratios have already fallen too far.

If the planned evaluation of recovery plans at year-end shows insufficient improvement, pension funds can wait until 1 April 2012 before implementing the necessary discounts, he said.

With respect to the also adopted resolution from Tony van Dijck, MP for the PVV, Kamp announced a study into the options of an alternative 'risk-free' discount rate.

The minister said he would make the outcome part of the discussions about the pension reforms in the coming months.

However, Kamp warned of the adverse effects of a quick switch to an alternative risk-free rate for pension funds that have hedged the interest risk on their liabilities based on the swap curve.

A different discount rate will cause different risks, which could turn out expensive if both rates start to diverge, he said.
 

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