Dutch pension funds' average coverage ratio has dropped suddenly by 1.5 percentage points to between 108 and 109 per cent since the start of December, according to Mercer and Aon Hewitt.
The status of year-end funding is crucial for the question of whether pension funds must cut pension rights next year, following the expiration of their five-year recovery plans. Dennis van Ek, actuary and principal at Mercer, attributed the sudden drop to a combination of widening swap rates and negative returns on equities. “The 30-year swap rate has increased from 2.61 per cent to 2.69 per cent, causing a funding loss of more than 0.5 percentage points, as a consequence of the discount method for liabilities, based on the three-month average of the forward curve", he said.
A 2.5 per cent loss on equities – following a 1.4 per cent decrease on the MSCI World index and a 3.4 per cent loss on the MSCI Europe Index – has caused funding to drop by another 0.75 percentage points, according to Van Ek.
The recent developments do not bode well for pension funds, with an average funding of 104.3 per cent, approximately the minimum required level. Based on an average funding of 110 per cent at the end of last month, Aon Hewitt predicted that as many as 37 pension funds were facing rights cuts.
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