Dutch Scheme Funding Declines During Second Quarter

Until recently, 104.2% was the minimum required funding level. Pension funds with a shortfall for a continuous period of five years had to cut benefits.

However, as part of the pensions agreement struck between the social partners and the cabinet in June, the government decided to temporarily lower the minimum required funding level to 100%, in order to reduce the chance of cuts.

DNB said that pension funds’ coverage ratio dropped by 1.3 percentage point to 106% on average in the second quarter of 2019.

The funding level of 51 schemes fell short of 104.2%, while 53 pension funds – representing 20% of all pension entitlements – were more than 104.2% funded.

110 pension funds had a funding level exceeding 110%, which would allow them to grant at least partial inflation compensation. Full indexation is allowed only when a scheme reaches a coverage ratio of more than 125%.

Despite the government lowering the minimum required funding level to 100%, many of the Dutch pension funds – including four of the five largest – face imminent benefit cuts following the introduction of lower assumptions for future returns.

As a consequence, pension funds’ “critical funding level” is to increase. Schemes with a shortfall relative to this critical coverage level must cut pension rights immediately.

This has put the €442bn civil service scheme and the €217bn healthcare scheme PFZW in the danger zone. Under the old rules, their funding level at the end of 2020 would have been the criterion for rights discounts in 2021.

The large metal industry schemes PMT (€77bn) and PME (€50bn) still facing cuts in 2020, as their funding ratio at the end of the second quarter was below 100%.