High projected returns on investments in recovery plans
Pension funds with a funding deficit – i.e. with a policy funding ratio below the required minimum threshold – must draw up a recovery plan and submit it to the supervisory authority. The recovery plan sets out how they expect to make up the shortfall within a maximum period of ten years, showing the impact of contributions, index-linking and returns on investments on recovery. They can decide to include curtailment in the recovery plan as a last resort. The 143 recovery plans show that almost all 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 is 6.75%. Most pension funds have based their recovery plans on this maximum percentage, and not on adjusting pension contributions. In general, contributions have a negative effect on recovery, since many pension funds actually impose lower contributions than required to cover pension commitments.
Projected returns on investment have failed to materialise before
Many pension funds have had to submit a recovery plan for several consecutive years. Projected returns on investments have been the main instrument for recovery in these previous plans as well. Figure 1 shows the projected recovery in pension funds’ recovery plans for 2015 compared to the actual recovery. It is clear that actual recovery remains far below projected recovery. The recovery seen in 2017 was nearly completely cancelled out in 2018.