Dutch regulator De Nederlandsche Bank (DNB) has announced it will give pension funds the possibility to maximise proposed pension cuts at seven per cent, while it has also corrected the calculation of the interest rate at the end of 2011, on which pension funds’ liabilities are based. DNB said both decisions were necessary to decrease the uncertainty around pensions.

Due to the exceptional market conditions and poor liquidity in the long end of the swap market, there is a lot of doubt whether an accurate price was found for the swap market on 30 December 2011, DNB said. It therefore decided to base the year-end curve on a three-month average, from 1 October to 31 December 2011.

After the interest rate correction, the average funding level of pension funds at 31 December 2011 is estimated at 98 per cent. DNB estimates that around 125 pension funds will have to announce a pension cut in May, or take other steps to reach an appropriate funding level of at least 105 per cent, compared to 180 funds if the interest rate had not been corrected.

Any pension cuts will come into effect from 1 April 2013, but because the final height of the cuts will be uncertain for a long period, pensioners and members would face long-term uncertainty on what might be huge income effects.

After consulting with the Ministry of Social Affairs and Employment, DNB has therefore decided to cap the pension cuts at seven per cent. Any further cuts that then need to be made will be decided on in early 2013, as at the end of that year pension funds will have to have a funding level of at least 105 per cent.

ABP called it a “wise decision” from DNB to base the funding level of pension funds at the end of December 2011 on the average interest of the last three months of 2011. However, the public sector fund can not yet say if it will have to take further steps in order to make the recovery plan, although it said it will be a close call.

In a statement, the pension fund said: “DNB’s decision to calculate the interest rate, which pension funds have to use to calculate their liabilities, over the last three months of last year, is in line with a previously expressed wish of ABP. ABP has been pleading for an adjustment of the current system used, which makes the funding level dependent on daily pricing of the interest rates. This leads to heavily fluctuating funding levels and creates unrest. ABP believes that, with this decision, DNB makes a step in the right direction.”

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