The average funding ratio of Dutch defined benefit (DB) pension funds fell from 128 per cent in August to 122 per cent in September, Aon’s Pension Thermometer has revealed.

The decline was primarily attributed to another sharp rise in interest rates combined with poor equity results.

Aon noted that the rise in interest rates had resulted in a decrease in liabilities, but this was more than offset by the reduction in equity and fixed-income portfolios.

Meanwhile, the indicative policy funding ratio, which is based on the average funding ratio over the past 12 months, rose slightly from 117 per cent to 118 per cent over the month.

Aon warned that these were “turbulent times” for investors amid high inflation and rising interest rates, which resulted in all investments falling.

Global equity returns fell by 8 per cent, with developed markets equities falling by around 7.7 per cent and emerging markets equities declining by more than 9 per cent.

The thermometer noted that real estate stocks underperformed by -10 per cent on sharply rising interest rates and fears of a recession.

Credit risks also increased in the bond portfolio, which translated into negative returns on corporate bonds (-3.3 per cent) and high yield (-4.9 per cent).

Long-term interest rates rose, causing the entire fixed-income portfolio to fall by approximately 8.5 per cent, with the portfolio overall declining by approximately 8 per cent.

Furthermore, inflation in September reached 17.1 per cent, with Aon highlighting the significant increase in energy prices as the primary driver.

“The pressure to also increase supplementary, especially small pensions, is only increasing”, said Aon Wealth Solutions Netherlands CEO, Frank Driessen.

“With the skyrocketing inflation, the purchasing power of retirees is a major concern. With the current high funding ratios, it is difficult to explain if an indexation is not granted, while especially for the lower incomes, the water is on their lips. However, we do not expect funds to be able to compensate for full inflation.

“There is simply not that much funding ratio. Funds would also like to keep a buffer for the transition to the new system.

“We do see, however, that with this sky-high inflation, funds that previously did not want to make use of the General Administrative Order, which offers additional indexation options for 2022, are now reconsidering.

“We expect that many funds will decide to add additional indexation in these last few months. The development of the funding ratio of the pension funds will remain very exciting in the coming months.

“There is so much going on in the world that it makes it very difficult for pension funds to make informed decisions.”

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