103 Dutch Pension funds may curtail pension benefits

103 Dutch Pension funds may curtail pension benefits

103 pension funds have reported funding deficits to De Nederlandsche Bank (DNB) which will compel them to curtail pensions. The curtailment is necessitated by the requirement to restore funding ratios by end-2013.

In early February, 298 pension funds operating under the constraints of crisis recovery plans reported interim evaluations to DNB, indicating whether recovery according to plan was still feasible – meaning that restoration of the regulatory minimum ‘own funds’ and regulatory capital looked possible within the statutory recovery periods of, respectively, 5 and 15 years. Whether or not this was the case, depended on pension funds’ financial position on 31 December 2011. Funds whose recovery plans proved no longer realistic must take additional measures. Such measures might include a contribution increase, a one-off capital injection by the sponsor(s), a subordinated loan or, as a last resort, the curtailment of pension rights and benefits. 117 funds stated that additional measures of some kind would be inevitable, in line with the circa 125 estimated earlier by DNB.

Concrete figures
Of these 117 pension funds, 103 have announced that they must resort to curtailment. The measure will affect some 7.5 million active members, pensioners and ‘deferred members’. (Note: pension fund members who have switched jobs without taking their pension rights with them to the new employer’s pension fund may be counted double in the statistics.) The total pension liabilities of the 103 curtailing funds amounts to some €390 billion. The weighted average (preliminary) curtailment rate reported by the pension funds is 2.3%. 34 funds announced their intention to cut by over 7%, and of these, 15 have indicated a wish to use the option to limit curtailment to 7%.

For most funds, the curtailment measure will not take concrete effect until 1 April 2013. The final decision to go ahead with the measure will be taken on the basis of funds’ financial position at end-2012. This procedure is intended to prevent curtailment decisions from being based on just one measurement. The Pension Act requires that pension funds inform all those concerned no later than one month before the curtailment takes effect.

Curtailments with effect from 1 April 2012
Eight pension funds will already be applying cuts as of 1 April 2012 – whether or not on top of a planned curtailment in 2013. These include funds that announced provisional curtailment decisions in 2011, and funds that have opted to bring the curtailment forward. These cuts will affect 17,000 active members, 9,000 pensioners and 33,000 deferred members. The total pension liabilities of these eight funds amounts to some € 2.9 billion, and the weighted average curtailment is 6.8%.

Names of curtailing funds published by ‘Pensioenfederatie’
By mutual agreement, pension funds intending to curtail pensions will notify their umbrella organisation called Pensioenfederatie. DNB is prevented by law from disclosing the names of the pension funds concerned. The names of the funds that have announced a (provisional) decision to cut pensions, will be disclosed by the Pensioenfederatie.

DNB launches assessment of recovery plan evaluation reports
During the coming months, DNB is to assess the pension funds’ recovery evaluation reports. After checking the reports for completeness and sending out any required re-reporting requests, DNB will assess the substance of the evaluation reports. In assessing the reports DNB will, on the one hand, look at a number of cross-sector spearhead topics, such as contributions (amounts, rates) and returns on investments. On the other hand, individual funds’ reports will be subjected to in-depth analyses whose scope will emphatically include a fund’s specific characteristics and risk profiles.  In the course of May at the latest, DNB will communicate its assessments to the funds in writing. In the case of funds that apply curtailment as of 1 April 2012, DNB will evaluate whether the distribution of cuts reflects a balanced consideration of all interests involved. For the other funds, such evaluations will be made once the provisional curtailment is made final with effect from 1 April 2013.

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