It is estimated that these cuts, impacting benefits and accrued pension entitlements alike, will affect 2.0 million active members, 1.1 million retirees and 2.5 million deferred members (note 1). The weighted average cut (note 2) based on this estimate is 1.9%.
In comparison with the proposed cuts as decided on and announced by pension funds last year, the cuts to be actually applied will be lower in terms of the number of pension funds having to make cuts and the average size of the cuts. At the time it appeared that some 103 pension funds with recovery plans would not be able to escape cuts (see press release dated 20 February 2012), when the weighted average cut came to 2.3%.
This positive development is attributable to an increase in funding ratios at the end of 2012 compared to a year earlier. The average funding ratio as at 2012 year-end came to approximately 102%, an increase relative to the 98.2% recorded at end-December 2011. In addition to favourable developments in the equity markets, the recovery of funding ratios by more than 3 percentage points can be attributed to a new calculation method of long-term liabilities, the introduction of the ultimate forward rate (UFR) (note 3) that was announced in the letter dated 24 September 2012, also known as the September letter (see press release issued on 24 September 2012).
It should, however, be noted that the average cut of 1.9% that has now emerged from the preliminary figures does not mean that retired fund members will see their incomes drop by the same percentage. This is because retired members receive their pensions as a supplement to their AOW state pensions.
Pension funds having to apply cuts in pension payment benefits in April 2013 should have informed their members and retirees accordingly by 1 March 2013 at the latest. The preliminary figures on the expected cuts take into account the funds that last year indicated that they had exercised the option to maximise the cuts at 7% as of 1 April 2013. The remaining cuts to be applied by these funds will be passed on to next year.
According to the same preliminary figures, approximately 40 pension funds are also expected to announce having to apply conditional cuts as of 1 April 2014, if necessary. This is estimated to affect 1.3 million active members, 0.7 million retirees, and 1.1 million deferred members. The weighted average cut for these funds based on this estimate is 1.6%. These intended cuts, which will also be announced this spring, are not definite yet and partly depend on the funding ratios of pension funds as at 2013 year-end. In addition, these cuts to be applied as of 1 April 2014 may be maximised to 7% if pension funds meet the conditions of the September letter.
The cuts have become necessary to restore pension fund buffers. The majority of pension funds have recovery plans that run until the end of this year and focus on bringing their funding ratios back to a level of approximately 105%, the legally required level, within five years. As a rule, the recovery period is three years, but in 2009 this was extended to five years in the light of the financial crisis.
The above figures do not yet include any additional measures that the pension funds may take to bring their funding ratios back to the required level, for example additional employers' contributions. If this is the case, the number of curtailed funds will drop as will the size of the cuts.
By mid-February the pension funds must submit to DNB their final year-end 2012 funding ratio figures as well as their recovery plans as part of the evaluation of their recovery plans. Shortly after receiving these final figures from the pension funds, DNB will communicate on them for the sector as a whole. After receiving the evaluation of the recovery plans, DNB will form an opinion on the 2012 evaluations as soon as possible. DNB aims to inform pension funds that will be obliged to make cuts before 1 March 2013 and by 1 April 2013 at the latest.
It is to be expected that a number of those funds will go public on possible cuts themselves in the weeks ahead. In addition to this, the Federation for Retirement Provision will ask pension funds that plan to apply cuts to report this to the federation on a voluntary basis. The Federation wants to publish the names of these funds in the second half of February. Pension funds are obliged to inform their members by 1 March 2013 at the latest of their intended cuts from 1 April 2013.
In addition to some 70 pension funds that are expected to be forced to apply cuts from 1 April 2013, there are five pension funds that already applied cuts at the end of 2012. The cuts made by these five funds affect some 4,000 active members, 5,000 retirees and 6,000 deferred members.
For further information, please contact Tobias Oudejans at +31 20 524 3100 or +31 6 524 96 961, or Remko Vellenga at +31 20 524 2712 or +31 6 524 96 574).
Note 1 Fund members and retirees who have switched employers without taking their pension rights with them to their new employer's pension fund may have been counted more than once in the statistics.
Note 2 This is a weighted average based on the technical provisions (pension liabilities) of the curtailing funds, which at the end of Q3 2012 amounted to some EUR 400 billion. The total technical provision for all reporting funds stood at approximately EUR 900 billion at the end of Q3 2012.
Note 3 The ultimate forward rate is an estimate of risk-free interest rates in the long to very long term based on the premise that these are difficult to infer from the financial markets.