NETHERLANDS - The €119bn healthcare scheme PFZW has warned that it is heading for a rights discount if its financial position fails to improve quickly, with funding falling by 5 percentage points to 92% in the second quarter.

Peter Borgdorff, the scheme's director, told IPE: "We are not in a good shape. The alarm has been raised."

He said the fund's 2.5m participants must expect a contribution increase of 2.5 percentage points and/or a rights discount if a recovery fails to materialise.

Although PFZW's board still needs to decide on measures, Borgdorff said he was expecting a combination of a decrease of benefits and a premium increase to balance the interests of all participants.

According to the director, the funding ratio is almost back at the level of 2008, when the pension fund had to draw up its recovery plan.

He said the expected new discount rate for liabilities - the ultimate forward rate (UFR) - could improve the scheme's funding by 7 percentage points.

"But, even in this case, we are not out of the woods yet," he added. "At best, the cuts can be less."

He also argued that the introduction of the three-month average of the forward curve as a temporary discount rate - to reduce the volatility of coverage ratios - had solved nothing.

"Averaging is only useful during bad times," he said. "If interest rates start to rise, we need to carry the bad months with us as well."

PFZW reported a quarterly return of 1%, taking its first-half return to 5.5%.

It attributed the modest performance in part to ongoing concerns over Spain and Italy.

With a return of 6.1%, government bonds, inflation swaps and interest swaps were the best performing investment category, according to the scheme.

Private equity holdings generated the best return - 4.4% - within its securities portfolio, while infrastructure and insurance returned 2.5% and 2.8%, respectively.

By contrast, PFZW lost 3.9% on equity investments and 16.1% on its commodities portfolio.

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