The Netherlands’ financial regulator has relaxed its funding requirements for underfunded pensions to allow greater time to reach full solvency.
De Nederlandsche Bank (DNB) will give Dutch pensions up to 12 years to address funding shortfalls—a four-fold increase on the current recovery time limit. The regulator indicated this would reduce the need for pension funds to cut payouts to pensioners, as has been necessary in the past.
“The assessed plans have revealed that the pension funds expect to achieve recovery almost exclusively based on projected returns on investments.” —De Nederlandsche Bank“Under the new statutory assessment framework, however, they must achieve a funding ratio of at least 104% within the first five years of the recovery period,” the DNB said in a report into 155 pensions’ deficit recovery plans.
“If a pension fund is unable to achieve this target within five years, for instance because its projected returns on investment failed to materialise sufficiently, it will have to resort to curtailing pension benefits after all,” the regulator said.
However, cuts to payouts can be spread out over as much as 10 years to dampen the impact on members, the DNB confirmed.
The DNB assessed the recovery strategies of 155 underfunded pensions, following the introduction of new pension assessment guidelines earlier this year. One unnamed fund was ordered back to the drawing board to improve its plan.
The recovery plans indicated that it would take a pension fund on average six and a half years to return to full funding. Dutch pensions are required to maintain a minimum 105% funding ratio.
“The assessed plans have revealed that the pension funds expect to achieve recovery almost exclusively based on projected returns on investments, which on average amount to 4.7%,” the regulator said.
For some funds, fully-funded status is far closer: One-fifth of the pensions that submitted recovery plans should be able to resume partial indexation of benefits this year, the DNB reported, while two-thirds would be able to do so by 2018 if their recovery strategies go to plan. Pensions must have a funding ratio of at least 110% before they can grant benefit increases.
The DNB’s decision comes after it adjusted the Netherlands’ actuarial interest rate in July from 4.2% to 3.3%. This move increased liabilities and pushed some funds below the 105% funding threshold.
The Dutch regulator’s bulletin announcing the findings of the report is available on its website.
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