The two largest Dutch pension funds reported positive returns but much lower funding ratios in the quarter ended June 30, largely because of a decrease in the average interest rate used to value liabilities.
The €261 billion ($320 billion) Stichting Pensioenfonds ABP, Heerlen, reported investment returns of 0.1% for the quarter ended June 30, and 6% for the first six months of this year. Returns totaled 0.8% in the second quarter of 2011, and 1.7% for the first half of the same year.
Despite positive returns overall, ABP's funding ratio fell to 90% as of June 30, or five percentage points lower than the previous quarter. As of June 30, 2011, ABP's funding ratio was 112%. If the funding ratio doesn't improve significantly by the end of the year, a reduction of 0.5% in pension payments will go into effect in April 2013, according to a news release issued by the pension fund.
Dutch rules require both funds to reach a 105% funding ratio by Dec. 31, 2013. However, government proposals currently under consideration may help Dutch funds meet solvency requirements by changing the way pension liabilities are calculated.
For the first quarter of 2012, private equity and hedge funds were the best performing asset classes, at 7.7% and 6.5%, respectively. Real estate added 4.5%, and the pension fund's opportunity fund — which comprises alternative investments such as music rights and catastrophe bonds — returned 2.8% for the same period. Elsewhere, fixed income added 1.8% in returns, with corporate bonds outperforming other fixed-income assets with a 3.9% return.
Both developed market equities and emerging market equities reported losses of 1.2% and 4.6%, respectively. Commodities returned -6.3% for the same quarter.
Also, the Netherlands' second largest fund — the €118 billion Pensioenfonds Zorg en Welzijn, Zeist — reported a funding ratio drop to 92% in the second quarter compared to 96% in the previous quarter and 110% for the same quarter last year.
“Although our assets under management have grown further due to the returns achieved, low interest rates and rising life expectancy mean that pension reductions and contribution increases may be unavoidable next year,” Peter Borgdorff, managing director at PFZW, said in the quarterly update.
The interest rate used to value Dutch pension fund liabilities fell to 2.27% from 2.54%, according to the financial update.
PFZW returned 1% for the quarter ended June 30 and 5.5% for the first half of this year, compared to 0.4% for the quarter ended June 30, 2011, and 0.8% for the first half of 2011.
Private equity returned 4.4% for the quarter ended June 30, while equities lost 3.9%. Hedge funds also ended the quarter with a loss of 1.2%. Other assets that helped to boost returns include inflation swaps, which added 6.1%; high-yield and emerging markets debt, which added 2.3%: and infrastructure, which returned 2.5%.