The fundamental principle guiding DNB's decision is that the interests of pension scheme members must be put first. It is important for members that pension liabilities and contributions are set at realistic levels. The new UFR calculation better takes into account actual market rate developments. The actuarial interest rate thus becomes more realistic than the current, relatively high, fixed rate level that pension funds until now had to use for their calculations. This means that the adjustment of the UFR leads to more realistic price-setting. At the same time, the UFR continues to offer protection against overly stringent measures in response to shocks in the financial markets.
Adjustment of UFR results in more realistic actuarial interest rate for pensions
|Date||14 July 2015|
De Nederlandsche Bank N.V. (DNB) today announced that the ultimate forward rate (UFR) for pension funds, which forms part of the actuarial interest rate they use to calculate the value of future liabilities, will be determined in a different manner from 15 July 2015 onwards. The adjustment follows the advice by the UFR Committee of year-end 2013, which recommended this adjusted UFR calculation to achieve a more realistic determination of the actuarial interest rate used.
Figure 1: Current and adjusted UFR
Government welcomed UFR Committee's advice
The adjustment of the UFR is in line with the advice of the UFR Committee following a study commissioned by the State Secretary of Social Affairs and Employment. The Committee, whose members were Dutch professors, studied how the actuarial interest rate could best be calculated. It also consulted international market parties and experts. It published its advice in October 2013. The Government welcomed the advice, indicating that it would be desirable for the method the Committee had recommended to be introduced with effect from 1 January 2015. DNB subsequently indicated that it would follow the Government's preference.
In December 2014 and at the request of the State Secretary of Social Affairs and Employment, DNB communicated that the announced adjustment of the UFR as at 1 January 2015 would be postponed for some time, pending the adoption of the final international solvency requirements for insurers. This allowed for an investigation into the desirability of an adjustment to the new UFR method, which was not the case.
Well-balanced consideration of interests
One of the key principles in the Pensions Act is a well-balanced consideration of the interests of various groups of pension scheme members, such as young people and pensioners. Pension fund board members are required to adhere to that principle in their decision-making. It is a fundamental precondition for well-balanced consideration of interests that pension liabilities assumed and contributions to be charged are set at realistic levels. This is important for pension fund members, as insufficiently realistic price-setting will have consequences for both the expectations of and the benefit payments to members. If the actuarial interest rate is too high, pension payments will also be too high and pension contributions too low. The burden will then be shifted to the future.
Protection against shocks remains
In parallel, the advantages of applying the UFR remain, such as protection against shocks in the financial markets. The UFR was originally introduced to reduce the impact of shocks on pension funds. In the past, these prompted stringent measures reflecting economic conditions at the time. For this reason, it was decided in 2012 to use an actuarial interest rate that factors in long-term expectations for interest rates.
Impact of the implementation
The new calculation method leads to a new UFR that is currently 3.3%, which is below the presently applicable 4.2%. Valuation based on a lower interest rate for the new UFR will result in a slightly lower funding ratio. This could mean that some funds may have to submit a recovery plan. The adjustment of the UFR is not expected to result in additional benefit reductions, but it may lead to higher pension contributions, depending on the pension contribution system of the individual pension funds and the actual contributions they are currently charging. The actual impact will not become clear until contributions for 2016 are set.
To read DNB's decision, see the Downloads-section