Measures taken by DNB to reduce uncertainty about pensions

News
Date 6 January 2012

De Nederlandsche Bank (DNB) has decided to permit pension funds for the time being to subject planned curtailments of pension rights and benefits to a maximum of 7%. DNB has so decided in the light of the impact of pension changes on macro-economic developments. In addition, DNB has decided to make an adjustment to the yield curve as at the end of 2011. This is necessitated by the exceptional conditions prevailing in the financial markets. Both these measures aim at reducing uncertainty about pensions. After this adjustment, the weighted average funding ratio of the pension funds as at 31 December 2011 comes out at an estimated 98%. DNB estimates that next May about 125 pension funds will have to announce an intended curtailment of pension rights and benefits or other measures to ensure timely recovery. If these measures had not been taken, about 180 pension funds would have had to take corrective action.

Setting a maximum for curtailments of pension rights and benefits

As a result of the deepening financial crisis in 2011, it is likely that in May of this year a large number of pension funds will have to announce considerable curtailments of pension rights and benefits. If their financial position does not improve in 2012, these funds will have to enforce the announced curtailments effective 1 April 2013 in order to restore the minimum required funding ratio of 105% within the statutory period for recovery. As the actual level of the curtailments will remain uncertain for a considerable time to come, pensioners and pension scheme members will be faced with prolonged uncertainty about potentially major effects on their income. Considering the exceptional market conditions and their potential macro-economic effects, DNB has decided, in consultation with the Ministry of Social Affairs and Employment, that, in principle, pension funds will be permitted to subject the curtailment to be effected on 1 April 2013 to a maximum of 7%. In cases where a lower percentage curtailment is necessary, that lower percentage will, of course, apply. If the evaluation for the year 2012 should show that the recovery achieved was insufficient, the planned curtailment of 7% must be effected no later than 1 April 2013. A decision about any further curtailment must be taken in early 2013. No later than end-2013, which for most pension funds represents the end of the recovery period, the minimum required funding ratio of 105% must have been restored.

Postponement of the implementation of severe curtailments should ensure that pension funds’ boards are given more time for a well-balanced consideration of the interests of the various stakeholders and well-balanced decision-making. The pensioners and pension scheme members concerned are thus given more time to prepare for the expected decrease in their pension rights and benefits.

Yield curve adjusted

Every month, DNB publishes a current yield curve based on the rates in the interbank swap market. In determining the yield curve as at the end of 2011, DNB has made an adjustment.

Over the past few months, DNB has closely monitored the movements in the yield curve. Considering the exceptional market conditions and the low liquidity level at the long-term end of the interbank swap market, there is undue uncertainty about the question whether pricing in the interbank swap market on 30 December 2011 was adequate. Hence, DNB has decided to make an adjustment by basing the curve as at the end of December on a three-month average, by calculating the average of the yield curves for all trading days in the period 1 October – 31 December 2011.

In order to ensure a level playing field in this area between insurers and pension funds, the adjustment applies to both of them. Additionally, in the same light, DNB has decided that insurers which rely on the ECB-AAA curve should also be permitted to apply three-month averaging, provided that they submit a request to that effect to DNB. In that case, they may use the average of the ECB-AAA curves for all trading days in the period 1 October – 31 December 2011 in the calculation of the yield curve as at the end of December.