DNB assesses pension funds’ recovery plan evaluations

Date 25 April 2013

DNB has over the past few months assessed recovery evaluations of 274 Dutch pension funds. The outcome of the assessment agrees in almost all respects with figures disclosed earlier. In all, 66 pension funds had to curtail pensions as of 1 April 2013, two less than the initially reported 68. Two pension funds were able to cancel the curtailment thanks to supplementary contributions by the sponsor.

Thus a large majority of pension funds eventually did not have to apply curtailment as of 1 April 2013.
The curtailment applied by 66 funds was necessitated by the requirement to restore funding ratios by the end of 2013. At that point, every pension fund must have a funding ratio of at least circa 105%. (Footnote 1) The impact of the curtailment is not limited to pensioners: the rights accumulation for active members is also reduced.

As DNB reported earlier (see DNB’s 19 February news bulletin) 37 funds expect to have to curtail pensions further in order to achieve recovery in time. This is apparent from their reporting to DNB. Esitmated at a weighted average of 1.7%, the further curtailment is as yet provisional and will depend on the development of the funding ratio in 2013.

Curtailment in figures

Of the 415 pension funds in the Netherlands, 66 have decided, in view of the financial situation prevailing on 31 December 2012, to apply curtailment as of 1 April 2013; thus a large majority of pension funds did not have to curtail pensions. Some pension funds were even able to provide indexation in 2012. In its DNBulletin on Five years in the pensions sector: curtailment and indexation in perspective, of 7 March, DNB discusses the deeper causes of these differences between pension funds.

In all, curtailment is faced by some 2 million active members, 1.1 million pensioners and 2.5 million ‘sleepers’. (Footnote 2) The total pension liabilities of the 66 curtailing funds amount to some EUR 410 billion. The weighted average (Footnote 3) of the curtailment rates as reported by the pension funds is 1.9%. 18 funds opted to cap the current curtailment at 7%, while one fund applied a higher curtailment.

Next year, all funds will have to attain full recovery. To do so, 37 pension funds expect to need another curtailment to realise this aim. If applied, the further curtailment will affect 1.3 million active members, 0.7 million pensioners and 1.1 million sleepers. The weighted average curtailment rate, as currently estimated by these pension funds, will be 1.7%.

Next year’s curtailments are as yet provisional, because they depend on pension funds’ funding rates as they will be at year-end 2013. The position of a fund’s funding ratio depends largely on the current discount rate used to value the liabilities, and on the performance of invested assets. The funding ratio may therefore turn out higher or lower, depending on interest rate and investment developments. By consequence, there is a possibility that either more or fewer than 37 funds will have to curtail pensions next year, while the curtailment itself may turn out higher or lower. If, for instance, interest rates pick up or investments perform better than the prudent estimates underlying the pension funds’ recovery plans, then the number of curtailing funds and/or the curtailment rate may turn out lower.

Any curtailment in 2014 may again be capped at 7% if the pension fund meets the requirements of the ‘September Package’. (Footnote 4)

DNB’s assessment of recovery plan evaluations

In their February 2014 evaluation reports to DNB, 274 pension funds stated whether their recovery plan still qualified as realistic and achievable. Funds assessed by DNB to need curtailment this year were informed before 1 March, so that they still had time to inform their members regarding the curtailment. With regard to funds that have applied curtailment as of 1 April 2013, DNB also evaluated whether the distribution of the curtailment reflects a balanced consideration of all interests involved.

For further information, please contact Tobias Oudejans, tel. +31 20 524 3100 or +31 6 524 96 961, or Remko Vellenga, tel. +31 20 524 2712 or +31 6 524 96 574.

1: This depends on the pension fund.
2: Pension fund members who have changed jobs without taking their pension rights with them to the new employer’s pension fund may be counted twice in the statistics.)
3: The average is weighted by the amount of technical reserves (pension liabilities) held by each curtailing pension fund. 
4: See the letter of 24 September 2012 sent by the State Secretary of Social Affairs and Employment to the Lower House of Parliament.