Skip to main content
MENU
Subscribe
  • Sign Up Free
  • LOGIN
  • Subscribe
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Face to Face
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • ESG Investing | Industry Brief
    • Innovation in ESG Investing
    • 2023 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2023 Defined Contribution East Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Research Center
    • The P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2023 ESG Investing
    • 2023 Private Markets
Breadcrumb
  1. Home
  2. Print
March 07, 2016 12:00 AM

Stress test shows cracks in European pension funds

Dutch plans said to be particularly vulnerable to a spike in liabilities

Sophie Baker
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    Gerard Riemen said low interest rates and stiff regulations have trapped Dutch funds in a corner.

    Awareness of the impact of low interest rates and volatile markets on pension funds is nothing new, but the results of the first stress test on these investors by a European supervisory authority has made clear how acute the problem is.

    The low-interest-rate environment has continued to take its toll on the liabilities side of pension fund balance sheets, and sources with knowledge of these institutional investors said no amount of investment would bring the assets up to a level necessary to tackle existing deficits.

    The European Insurance and Occupational Pensions Authority's stress test looked at a number of different scenarios for pension funds in European Union countries. But even before applying these stresses, it found that in the 17 tested countries, total liabilities outweigh assets by e428 billion ($477.8 billion) under its common methodology. With a severe stress — an abrupt drop in interest rates and an increase in inflation rates — this shortfall would hit e773 billion under EIOPA's model.

    It's a problem evident across the globe: The latest report from Wilshire Consulting showed the aggregate funded status of U.S. corporate pension plans fell to 78.3% at the end of February, down 1.1 percentage points. That was largely driven by an increase in liabilities coupled with flat asset growth.

    Falling gilt and equity markets have also hit U.K. pension funds, although the situation improved in February. The latest update from JLT Employee Benefits showed the total deficit of all U.K. corporate defined benefit funds fell 17.1% to £209 billion ($301 billion) in February, and fell 17.4% in the year ended Feb. 29. As of the same date, the funded ratio of these funds was 85%, vs. 83% at the end of January.

    But the problem is particularly acute in the Netherlands. Aon Hewitt said the average funding ratio of Dutch pension funds in January decreased five percentage points, to 97%. Pension funds in the Netherlands are considered solvent only at a 105% funded level.

    The stress test covered 140 defined benefit or hybrid institutions for occupational retirement plans, across 17 countries in the European Union. Dutch pension funds accounted for 44% of the total defined benefit funds sample analyzed by EIOPA in its stress test, which applied certain financial shocks to test the effect on funded shortfalls. It investigated the shock resistance of pension funds, and the systemic risk that they might pose for the stability of financial markets. While the conclusion was that the links were limited — which sources in the industry accepted — EIOPA's stress test was criticized for its narrow sample and its failure to reflect the impact of a crisis on member benefits.

    The EIOPA concluded: “The results of the severe stress scenarios applied show a significant increase in the deficits of assets over liabilities, revealing a number of risks and vulnerabilities that deserve proper attention from IORPS and supervisors. At the same time it is important to realize that the absorption of these shocks depends heavily on the time element for realizing liabilities and the mitigation and recovery mechanisms in place.” The authority added that further work is needed to gain deeper understanding on the effects of stress scenarios, “especially concerning the consequences of the extra pressure put on sponsors to increase their future contributions.”

    Nevertheless, the test did highlight one important issue: the Dutch central bank, De Nederlandsche Bank, issued a statement in January on the topic detailing its concern that the Dutch pensions sector is “vulnerable to financial market shocks, as pension funds have hardly any buffers left to absorb shocks amid the current low-interest environment.”

    True, but not surprising

    “It is true what DNB says — but it is also no surprise,” said Gerard Riemen, managing director of Pensioenfederatie, the Federation of the Dutch Pension Funds, in The Hague, Netherlands. Mr. Riemen said while the assets of pension funds in the Netherlands have fluctuated since the financial crisis of 2008, the overall picture is that assets have about doubled, but at the same time as liabilities have suffered from low interest rates and regulatory intervention.

    “We have to calculate at a risk-free discount rate, which is going down and down all the time. That means that our liabilities are sky high at the moment — and means our funding ratios at the moment are below 100. So there are no buffers,” he said.

    In a statement related to the findings of the stress test, Pensioenfederatie said: “The existing pension legislation in the Netherlands ensures that pension funds are able to spread financial shocks over a long period of time, for example through long recovery periods and the long-term character of their liabilities. As a consequence, they do have a stabilizing influence on financial markets, a conclusion that EIOPA draws as well. However, financial market shocks can have an impact on pension beneficiaries and employers,” which it said could, in certain situations, “lead to measures such as limiting or ending indexation or even the cutting of pension rights.”

    Waiting game

    Mr. Riemen said the only thing really left to do is to wait for interest rates to go up — “we cannot invest against this. On the assets side you never will be able to compensate (for) what's happening on the liability side.”

    But there is an ongoing debate around shifting to another kind of structure midway between defined benefit and defined contribution. “But the main characteristic should be that you are not dependent anymore on this interest rate — this is a system where you don't need a discount rate to calculate these liabilities,” said Mr. Riemen.

    While the debate has been ongoing, Mr. Riemen thinks it is now crunch time.

    “We have a little stress — we think we have to hurry up and come to conclusions before the end of this year, (as there is an) election in spring 2017.” Decisions over changes are not the domain of politicians, he said. “We want to come forward with solutions ourselves before the new politicians think they have to decide. We are in very bad shape — it is very difficult to explain that although since the financial crisis our assets have doubled, still we are very poor, are not able to index benefits, and there is a high risk that we have to cut benefits. Members simply don't understand. And if you cannot explain that to the people — if they don't understand about discount rates and liabilities — then they lose trust,” said Mr. Riemen.

    The U.K.'s Pensions Regulator also issued a statement after the publication of results, endorsing the conclusion that “the flexibilities within the U.K. pensions sector mean there is only a limited link between pension schemes and financial stability. Alongside these flexibilities, high-quality risk management and strong employer covenants are key for the resilience of U.K. schemes.”

    However, U.K. pension funds are still under pressure. “In the U.K., it is undoubtedly the case that we are vulnerable to shocks — our U.K. pension funding levels are simply inadequate to provide the guaranteed level of benefits,” said Charles Cowling, director at JLT Employee Benefits, based in Manchester, England. “The security that attaches to members' benefits is heavily dependent on the employers that are standing behind those pension schemes.”

    But the setup of U.K. pension funds allows them to ride out the storms, Mr. Cowling said. Similarly, the U.K. is not subject to mortality stress in the same way as the rest of Europe, he said. “We are pretty good at factoring in allowance for mortality improvement,” he said. “It is more the financial markets stress problems that could tip a significant number of companies over the edge.” n

    Related Articles
    U.K. pension funding deficit rises again in February
    Fed cites economic progress but leaves rates unchanged
    EIOPA recommends common risk assessment across all EU pension funds
    Moody's says Bank of Ireland's rising pension deficit is credit negative
    Dutch tire and wheel industry pension fund taps Kempen as fiduciary manager
    Stress testing a new normal for investors
    Recommended for You
    Read the print edition of P&I
    Read the print edition of P&I
    Gender diversity is improving on FTSE 350 boards
    Gender diversity is improving on FTSE 350 boards
    FINRA honors Wharton's Olivia Mitchell with Ketchum Prize
    FINRA honors Wharton's Olivia Mitchell with Ketchum Prize
    The Plan Sponsor's Guide to Pension Risk Transfer
    Sponsored Content: The Plan Sponsor's Guide to Pension Risk Transfer

    Reader Poll

    March 22, 2023
    SEE MORE POLLS >
    Sponsored
    White Papers
    The Need for Speed in Trend-Following Strategies
    Global Fixed Income: Volatility and Uncertainty Here to Stay
    Morningstar Indexes' Annual ESG Risk/Return Analysis
    2023 Outlook: The Top Five Trends to Monitor in the Year Ahead
    Show Me the Income: Discovering plan sponsor and participant preferences for cr…
    The Future of Infrastructure: Building a Better Tomorrow
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    December 12, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2023. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Face to Face
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • ESG Investing | Industry Brief
      • Innovation in ESG Investing
      • 2023 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2023 Defined Contribution East Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Research Center
      • The P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2023 ESG Investing
      • 2023 Private Markets