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.