The average Dutch funding ratio ‘rose sharply’ in May to 133 per cent, according to Aon Netherlands’ pensions thermometer.

Aon pointed to strong equity market returns as the driver of the increase, despite a modest fall in interest rates.

In addition, the average policy funding ratio, based on the average funding ratio over the past 12 months, increased to 127 per cent in May.

The consultancy stated that the equity market recovery, which began in April, continued through May, supported by the ongoing ceasefire and the extension of negotiations between the US and Iran.

Equities gained 5.7 per cent, with emerging market stocks rising 10.3 per cent, outperforming developed markets, which returned 4.9 per cent.

In the eurozone, bond yields fell amid expectations that Iran and the US were moving closer to a deal, contributing to lower oil prices towards the end of the month.

As a result, fixed-income portfolios gained approximately 1.5 per cent.
Overall, the total portfolio return was positive at 2.9 per cent.

Regarding interest rates, May saw the risk-free interest rate across the first 30 years of the yield curve fall by an average of seven basis points, while rates for longer maturities increased.

The Ultimate Forward Rate (UFR), used by pension funds to calculate the value of future liabilities, stood at 2 per cent. Overall, the fall in interest rates increased liabilities by around 0.3 per cent.

Aon highlighted that the recent recovery in financial markets could provide an opportunity for pension funds that have yet to complete their transition to the new pension system to consider funding-ratio protection strategies.

The consultancy noted that option premiums have fallen, while funding ratios have rebounded to levels seen before market concerns over a potential closure of the Strait of Hormuz.

“More and more pension funds are considering partially or fully hedging their equity risk. Given the transition process, we understand that decision,” Aon Netherlands director of wealth, Frank Driessen, said.

Aon also highlighted the ongoing debate around preserving pension purchasing power under the Dutch Future Pensions Act (Wtp).

The consultancy noted that one of the key drivers behind the shift to the new pension system was the limited scope for indexation under the previous Financial Assessment Framework (FTK).

While the Wtp was designed to provide greater opportunities to maintain members' purchasing power, Aon said achieving this in practice has proved more challenging.

It pointed to recent research commissioned by the Dutch central bank, DNB, which examined a range of mechanisms aimed at protecting pensions against inflation.

The study concluded that stronger purchasing-power protection comes at a cost, requiring either higher contributions, greater investment risk or the use of alternative instruments.

However, Driessen said the research did not consider the potential role of solidarity reserves or risk-sharing reserves in protecting members from unexpected inflation shocks.

“In our view, these reserves could be an effective tool for providing purchasing power protection during periods of high inflation,” he added.

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