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Sunday 16 December 2018

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Dutch regulator: pension funds expect high returns

Written by Ilonka Oudenampsen
26/05/17

Dutch pension funds expect to overcome their financial difficulties through high investment returns, according to the recovery plans of 181 funds with a deficit, which De Nederlandsche Bank (DNB) reviewed in the past months.

If those expected returns are not met, as was the case in 2015 and 2016, then 56 funds might have to cut pension benefits in 2020 and 2021, according to the regulator.

There are four ways in which pension funds can improve their financial position: cutting pension benefits, achieving a so-called over return on investments, a premium increase or delaying annual indexation.

The recovery plans DNB reviewed this spring show that almost none of the funds expect they will have to cut pension benefits. Only two funds, with a total of around 13,000 members, indicated they need to cut benefits in 2017.

The plans show that most pension funds expect their recovery will almost completely come from over returns. Over return is the extra return that is expected to be achieved on top of the return that is needed to finance the liabilities. In total the funds expect an over return of around €500bn in the next ten years.

DNB warns that some pension funds may need to cut benefits in the long term. According to the law, pension funds that have been below the minimum coverage ratio of 104.2% for five years need to cut benefits.

“Pension funds which have had a coverage ratio below 104.2% since 2015 or 2016 may face cuts in 2020 or 2021. Based on the coverage ratios at the end of 2016, this could mean that in 2020 11 pension funds will need to cut almost 2 million pensions and in 2021 45 funds will need to cut almost 8 million pensions,” DNB writes.

“In some cases, this pension cut can be substantial. For instance, if during the last moment of measurement a pension fund has a coverage ratio of 100%, then the pensions need to be cut by around 4%. This is an unconditional cut, although it can be spread out over ten years.”



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