Pensions: funding ratio

A pension fund's financial position determines whether it can increase pensions or must decrease them.

Man op de fiets - Pensioenen: dekkingsgraad

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The funding ratio reflects a pension fund’s current financial position, expressing the ratio between available assets and liabilities.  In other words: if the pension fund holds enough reserves to pay out pension benefits –  to its current and future members. The funding ratio is expressed as a percentage.

 Funding ratio calculation

The funding ratio is calculated as follows: the value of a pension assets (the fund's investments in equity and bonds) is divided by the value of its liabilities (the current and future pension benefits to be paid out):

                          value of assets
Funding ratio = ──────────────────────── x 100%
                          value of liabilities

The current value of a pension fund's liabilities is calculated using the actuarial interest rate.

The funding ratio determines a pension fund's options

The funding ratio is subject to statutory rules. For example, pension funds are only allowed to apply partial or full index-linking if their funding ratio exceeds 110%. Index-linking means that a pension fund is able to increase pensions to reflect rising prices. If a pension fund's funding ratio is too low, it must take measures to improve its financial situation.

Funding ratio rules:

Funding ratio

<104%

104-110%

≥ 110%

Actions by the pension fund

Taking measures

no index-
linking

Apply partial or full index-
linking

What if the funding ratio is too low?

A pension fund may decide to set higher contributions in order to improve its financial position. In extreme cases, a pension fund may have to decide to curtail pension benefits – not only for current pensioners, but also for members retiring in the future. This happens in the following two situations.

  • A pension fund fails to meet the minimum own funds requirement for five consecutive years. In most cases, the minimum own funds requirement equals a funding ratio of 104%.
  • The funding ratio drops below the critical lower limit. This limit is different for each pension fund.

Based on the funding ratio at the end of 2019, some pension funds would have had to curtail pension benefits in 2020. But the Dutch Minister of Social Affairs and Employment, Wouter Koolmees, has granted these funds more time to improve their financial position. As a consequence, most funds that are in trouble do not have to curtail pension benefits.


Purpose: balanced distribution

The main purpose of these rules is to ensure that pension funds distribute their pension assets in a balanced way between current and future pensioners. In favourable times, they can all benefit from rising pension benefits. If a pension fund has deficits, they must also bear the consequences together. For example, pension benefits may have to be reduced. This is of course a drastic measure, but the alternative is that the pension fund would pay out too much benefits now, leaving too little for future pensioners.

Pension funds: current situation

Many pension funds have had insufficient funding ratios for several years, this is partly due to low levels of interest rates, but pension funds’ choices in terms of investment and contribution levels also play an important role. Some pension funds have high funding ratios. Most of them collect higher contributions or have a different investment strategy.

Your pension fund's financial situation

Do you want to know how your pension fund is doing? Then check the statistics section on our website. It lists the funding ratio of all pension funds, as well as information on pension funds’ investments and returns.

FAQs

Pension funds have substantial reserves, why can't they apply index-linking?

It is true that pension funds have substantial reserves, but their liabilities are also substantial. Now, but also in the future. If a fund spends too much money now, there will be less for future pensioners.

Do pension curtailments only affect the group that currently receives pension benefits?

No, curtailments apply to current as well as future pensions. So this affects the pension benefits of current pensioners as well as of the people that are still working.