Most Dutch pension funds have returned to their required 105% minimum funding threshold, but fund officials are not out of the woods yet, consultants say.
A year after the collapse of Lehman Brothers Holdings Inc. and subsequent free fall in solvency levels, pension coverage ratios are still not stable “because markets are still very volatile,” said Arnold Jager, senior consultant at Hewitt Associates LLC based in Amsterdam. “On the liabilities side, it is also not very secure because liabilities are calculated based on (long-term) interest rates, which are also still volatile.”
Pension fund officials are left in a bind — if they decide to take less risk to lock in the improved coverage ratio, they might miss out on future market rallies. If they maintain the risk/return profile or add risk to portfolios and the market goes the wrong way, the coverage ratio will plunge below 105% again. (In calendar year 2008, it dropped to 95% from 144%.)
“If the funded ratios decline, the risk budget also declines, and that could force (pension fund officials) to take risk off the table and miss out on future upturns,” said Dennis van Ek, senior consultant at Mercer LLC, Amstelveen, Netherlands. “The problem is (pension officials) don't know which way the market is going and they don't want to be the rabbit caught in the headlights.”
De Nederlandsche Bank, the Dutch central bank and regulator of pension funds, requires that funds submit a five-year recovery plan if their coverage ratios — or the funding level needed to meet liabilities — fall below 105%. Funds must file a 15-year plan when their solvency levels drop below about 120% to 125%, depending on the risk profile of the investment portfolio.
In the first quarter of 2009, the majority of some 650 pension funds in the Netherlands were required to file a recovery plan to the DNB after their coverage ratios had dipped below the minimum 105%. By the end of the third quarter of this year, however, solvency levels had risen dramatically, averaging around 107%, according to estimates by several consultants.
Among the pension funds now at or above the minimum solvency level:
• The €180 billion ($267 billion) Stichting Pensioenfonds ABP, Heerlen, Netherlands, reported a 105% coverage ratio as of Sept. 30, vs. 90% at year-end 2008;
• The funding level for the €81.9 billion Pensioenfonds Zorg en Welzijn, Zeist, jumped to 107% at the end of September, from 92% at the year-end 2008;
• The €8.2 billion Pensioenfonds voor de Grafische Bedrijven, Amsterdam, recorded a 110% coverage ratio as of Sept. 30, vs. 97% at year-end 2008;
• The coverage ratio of the €1.9 billion Stichting Pensioenfonds TNO, Rijswijk, Netherlands, improved to 111% from 101% during the same period; and
• The €4.1 billion DSM Nederland Pension Fund, Heerlen, had a funding level of 112% compared to 98%.