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Dutch pension funds banking on higher investment returns to fill funding gaps

Dutch pension funds are betting on higher projected investment returns to help plug funding deficits, said central bank and regulator De Nederlandsche Bank.

The DNB's assessment of the recovery plans of 181 pension funds that have a deficit — based on the country's minimum required funding ratio — warned that in the case of 56 of these pension funds, lower-than-expected returns might lead to a cut in benefits in 2020 and 2021.

Dutch pension funds must draw up a recovery plan if their funding ratio is below the minimum required funding ratio of 123.9%. These plans must set out how fund executives intend to eliminate the gap and the DNB assesses whether fund recovery plans are meeting statutory requirements every year. When a funding ratio has been below 104.2% for five consecutive years, pension funds are required by law to curtail pension benefits until the minimum funding ratio reaches that level again. The first time this could happen might be in 2020, the DNB said in a bulletin on its website Thursday.

Based on funding ratios as of Dec. 31, the DNB expects 11 pension funds could be forced to cut benefits in 2020, and 45 in 2021.

Cutting benefits is one of four measures pension funds can propose in recovery plans to restore their financial positions. According to the DNB's assessments, only two pension funds, with a combined 13,000 participants, expect to have to resort to cuts.

Pension funds can also achieve a surplus through investment returns, by raising contributions, or by postponing annual index-linking, which are benefit increases in line with wages and price levels, the DNB said. The assessment found that over the next decade, pension funds expect to achieve surplus returns of about €500 billion ($546.4 billion) through investment returns.

Partial or full index-linking may be applied only when a pension plan's funding ratio hits 110%, and most pension funds in the DNB's assessment said they intend to do so with the aim of eventually applying full indexation.

The DNB also looked at the plans for 2015 and 2016, and said the average funding ratios over these years remained “virtually unchanged. This means that the recovery expected in the 2015 recovery plans failed to materialize. The same applies to the recovery plans for 2016,” the DNB said.