Dutch pension plans to stick to adjusted discount rate in revamp

Dutch pension funds will be allowed to calculate liabilities on the basis of an adjusted discount rate as the government seeks to keep the retirement system viable amid low interest rates and an aging population.

The nation's retirement funds, which oversee €1 trillion ($1.3 trillion) in assets, will be able to keep valuing their long-term liabilities on the basis of a “stable and realistic interest rate,” known as the ultimate forward rate, according to plans published today by the government. They will also be allowed to calculate solvency ratios, a measure of assets relative to future benefit payments, as a 12-month average.

Out of 415 retirement funds in the Netherlands, 66 said they would cut pensions by 1.9% on average this year as their financial buffers were below the regulatory threshold at the end of last year. More than half expected another cut would be needed next year, the central bank said in April.

The funds' solvency ratios have been depressed as liabilities are discounted at a market rate, meaning their value rises as rates decline. Even more funds would have to resort to cuts had the government not allowed them to use the ultimate forward rate as a provisional measure from October.

The adjusted rate is used to calculate liabilities in 20 to 60 years' time. The funds may use a three-month average swap rate to calculate liabilities with a maturity of less than 20 years, the government said in September. The plans announced today are meant to replace the temporary measures announced then as a longer-term reform. The government invited interested parties to comment on the proposals by Sept. 6.

The use of an average solvency ratio and the ultimate forward rate prevents “drastic measures as a result of sudden swings in the ratio,” the government said.

Under the proposals, funds can choose to offer their members a contract with guaranteed payouts, implying they have to maintain higher buffers and limit investment risks, or switch to a model that allows increases at least in line with inflation. Under the latter option, the funds will need higher investment returns and therefore riskier investments, Social Affair State Secretary Jetta Klijnsma said in the proposals.