Funding ratios of many of the largest Dutch pension funds are worse than their smaller counterparts, fueling fears that the road ahead will be harder than expected for the Dutch pension industry, according to consultants.
“The funding ratio is topic numbers 1 through 5 on every agenda at every board meeting of Dutch pension funds at the moment,” said Marjolein Sol, head of Mercer LLC's investment consulting business in the Netherlands, based in Amsterdam.
The majority of the roughly 650 pension funds regulated by De Nederlandsche Bank were required to submit a proposed recovery plan by April 1 because funding levels dropped to unprecedented levels in 2008. While all pension funds have been affected, new data indicate some of the largest funds have been hit the hardest, according to Bureau Bosch, an independent institutional investment consultant based in Nuenen.
Those funds include the €173 billion ($229 billion) Stichting Pensioenfonds ABP, Heerlen; the €68.3 billion Pensioenfonds Zorg en Welzijn, Zeist; the €33 billion Pensioenfonds Metaal en Techniek, Rijswijk; and the €19 billion Stichting Pensioenfonds Shell, The Hague.
ABP's solvency level fell to 90% at year-end 2008 from 140% a year earlier, according to Bureau Bosch. PfZW reported a 92% funding level vs. 146% a year ago and PMT's funding ratio declined to 86% from 142%. The Shell pension fund experienced one of the most dramatic drops, falling to 85% from 180%.
In comparison, the average pension funding level was 95% as of Dec. 31, compared with 144% a year earlier, according to data from the DNB.
“In general, large pension plans have been hit heavier than smaller ones,” said Frits Bosch, director of Bureau Bosch. “They can't get out of certain assets fast enough and they have had more trouble covering the mismatch between assets and liabilities.”
The DNB requires pension funds to submit a five-year recovery plan when the funding level drops below 105%. Originally a three-year plan was required but the time was extended because of the global economic crisis. A 15-year plan is required when a fund falls below the 125% mark. DNB officials declined to comment, saying they are still assessing all the recovery plans. Assessments are scheduled to be completed by July 1.
Plan sponsors are working on several fronts to improve their funding position, consultants familiar with the recovery plans said. Most will not increase pension payments to match any increase in the cost of living. Others have made one-time cash injections, and some have required additional employee contributions. But the most difficult decisions have come in investment portfolios.
Dutch pension funds are in “an immense dilemma,” Mr. Bosch said. “They have to decide whether to increase investment risk in order to attain the 105% funding ratio or decrease the risk in the portfolio in order not to slip into an even lower funding ratio.”
In 2009, ABP fund officials reduced equity by three percentage points and increased exposure to hedge funds, infrastructure and convertible bonds by one percentage point each. A three-year strategic investment plan for 2010-2012 is scheduled to be completed around January 2010.