Strong markets lift average funding at Dutch schemes to at least 104%

NETHERLANDS – Funding at Dutch pension funds increased by 3 percentage points on average in July to reach at least 104%, according to estimates from Aon Hewitt and Mercer.

Aon Hewitt put the average coverage ratio at 104%, while Mercer’s estimate was closer to 105%.

Although the market rate has fallen slightly over the past month, the official discount rate – the three-month average of the forward curve with the application of the ultimate forward rate (UFR) – has risen, resulting in a 1.5% decrease in liabilities, Aon Hewitt said.

official discount rate is the three-months average of the forward curve with the application of the UFR

In July, Dutch schemes’ assets increased by 1.5% on average on the back of strong performance of credit, which pushed up the value of fixed income investments by 0.2%.

In addition, rising equity markets boosted Dutch pension funds’ assets by 1.3%.

Mercer estimated a 1.5% drop in liabilities and a similar increase of pension assets.

Dennis van Ek, a principal and an actuary at the consultancy, pointed out that equity markets rose by 4%.

However, Aon Hewitt stressed that the positive developments in July did not mean the threat of additional rights cuts had disappeared.

Frank Driessen, chief commercial officer at Aon Hewitt, said: “Whether discounts are necessary will largely depend on the development of interest rates during the coming months.”

Aon Hewitt based its estimates on a hypothetical pension fund 30% invested in equity, 50% in fixed income and 20% in property, hedge funds, commodities and cash.

It also factored in a non-hedged currency risk, a 50% cover of the interest risk, a duration of 16 years and one-third of liabilities linked to pensioners.

Mercer said it employed the most recent figures from regulator De Nederlandsche Bank for its estimate, which included an equity allocation of more than 31% and fixed income holdings of more than 53%.

However, it also factored in a 45% interest hedge, a 50% currency hedge and a duration of 17 years.

Mercer’s Van Ek said the official discount rate for an average pension fund increased by 9 basis points to 2.51% in July, while the market rate remained unchanged at 2.47%.