Dutch pension funds expect to rely on surplus returns for recovery
At the end of 2019, the policy funding ratio of 150 Dutch pension funds was below the required level. They expect to make up these shortfalls using the rerturn on investments they expect to realise in the years ahead. This is evidenced by the recovery plans the pension funds had to submit to De Nederlandsche Bank (DNB) by 1 April 2020. The calculations are based on the figures as at 1 January 2020. This means the decrease in the value of assets and interest rates due to the coronavirus (COVID-19) crisis is not included.
Recovery period for pension funds extended
Dutch pension funds must draw up and submit a recovery plan to the supervisor if their policy funding ratio is below the funding ratio required based on their risk profile, referred to as their required own funds. A recovery plan sets out how a pension fund expects to make up the shortfall within a maximum period of ten years, showing the impact of contributions, index-linking and investment returns on their recovery. As a measure of last resort, pension funds can decide to include benefit curtailments in their recovery plans.
At the end of 2019, the recovery period was extended subject to specific conditions, from ten to twelve years. This extension applies to the year 2020. In introducing the extension, the Dutch government sought to create a period of calm and stability to enable the implementation of the pension accord. This measure also allows almost all pension funds to bring the funding ratio back to the required level without curtailments. The extended recovery period meant that a handful of pension funds did not need to apply a small curtailment.
Expected return remains sole source of recovery
The 150 recovery plans we assessed show that almost all pension funds expect to achieve recovery based on high projected returns on investments. The maximum percentage that pension funds are allowed to use to calculate their projected returns on investments in recovery plans is 5.6% for equities, for example. Most pension funds have based their recovery plans on maximum percentages and not on raising pension contributions. For most pension funds, contributions even have a negative effect on recovery. That is because a lot of funds cushion their contributions. This avoids undesired contribution fluctuations, but it also results in undercontribution compared to what is required to fund pension commitments.
Projected returns on investment have failed to materialise before
Many pension funds have been submitting recovery plans since 2015. Projected returns on investments were also the main instrument for recovery in these previous plans. Figure 1 shows the projected recovery in pension funds’ recovery plans for 2015 compared to their actual recovery. It is clear that actual recovery remains far below projected recovery. Where recovery plans for 2015 assumed a 19 percentage point increase of the funding ratio up to 2020, only 1 percentage point increase was achieved. The main reason is the fall in interest rates during these years, due to which most of the returns were needed to compensate for the increase in value of the commitments. Remaining returns to restore the funding ratio, the surplus returns, were therefore very limited.
Individual pension fund figures
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