New discount rate structure set for Dutch pension plans

The Dutch central bank this week published a new discount rate for pension funds to calculate future liabilities that's aimed at reducing funding level volatility, according to a statement on the website of De Nederlandsche Bank.

The new rate structure will be derived from the ultimate forward rate, which has already been implemented for Dutch insurers and is currently about 4.2% for the eurozone.

While there are subtle differences between the calculation methodologies for insurers and pension funds, the overall effect will be “a pension system that is financially more resilient, enjoys broad popular support and helps to allay widespread concerns over the costs and adequacy of people's pension reserves,” according to DNB.

“The UFR makes the liabilities less sensitive to fluctuations and to possible disturbances of the financial markets,” according to a statement issued late Wednesday. “This helps stabilize the compass by which pension fund boards steer.”

A separate paper published by MSCI in September said the main provision of recent regulatory changes made to calculate pension liabilities is “that the long end of the curve used for discounting liabilities would change from using market rates to the use of an ultimate forward rate.”

“The long end of the euro swap curve is very illiquid; instead of a market rate, the UFR would be set to reflect a long-term equilibrium level,” according to the paper, titled “The Ultimate Forward Rate: Implications for Dutch Pension Plans.”

For a representative portfolio examined by MSCI, changes in the discount rate would improve the funding ratio by about 3 percentage points to 101.63% from 98.58%. “The effect of this scenario is to reduce the riskiness of the duration mismatch,” according to the paper.