A report from the supervisor De Nederlandsche Bank (DNB) has shown that a number of pension funds must implement a reduction this year because they are waiting for high returns to save them.

The report revealed that many pension funds are still struggling with financial deficits, and of the 143 reviewed pension funds, three is at risk of having to reduce its members’ pensions in 2020 and 33 in 2021.

Furthermore, the funds at risk are expecting to get out of deficit – having a policy coverage ratio which is lower than the required coverage ratio – by getting high returns on their investments, DNB noted, after reviewing the funds’ recovery plans.

DNB said in a statement that the 143 assessed recovery plans included high expected investment returns.

“In a recovery plan, it is permitted to assume a maximum return of 6.75 per cent on shares. Most pension funds also base their recovery plans on the maximum return that can be calculated.”

The three funds at risk of having to introduce reductions account for 2 million participants, while the 33 funds next in line account for 7.7 million savers.

Commenting on the report, the Dutch pension fund association Pensioenfederatie said the message from DNB once again demonstrates the need for an alternative contract to the original plan.

“It also shows that pension funds can differ greatly from one another. These differences mean that funds cannot easily be compared, one to one,” it said.

The DNB report also showed that there are 121 funds that may index all or part of the pensions. These funds generally charge a higher premium, have hedged themselves more than average against falling interest rates and invest less in shares.

According to Dutch law, pension funds with a policy funding ratio above 110 per cent may partially index the pensions. Those with an even higher coverage are allowed to fully index.

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