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Saturday, 21 January 2012

The Dutch Pension Funds that have been battling low interest rates, as well as low yields on investments, throw the towel and reduce their pension payments

Due to the extremely low Euribor interest rate and the enduring blows at both the stock and fixed income market, many pension funds in The Netherlands are in trouble with their coverage ratio.

Where a ratio of 105% (i.e. having 5% more money in investments than is needed for fulfilling future obligations) is the legal minimum for a healthy pension fund, a substantial number of Dutch pension funds is below this amount. Far below…

Pressed by De Nederlandsche Bank (DNB; Dutch National Bank) these funds are considering the measures that are necessary to restore their coverage ratio. Although most pension funds are very reluctant to do so, a number of pension funds already had to decide to cut down the pension amount for the current and coming retirees, although the exact amount is still uncertain.

Het Financieel Dagblad (FD; writes on the largest pension fund ABP being forced to reduce its pension payments:

Pension fund ABP, the pension fund for civil servants and the largest in The Netherlands, announces a reduction of 0.5% on the pension amounts and raises the fee.The definitive decision on the reduction is taken by the board of directors on February 1. The temporary recovery raise on the pension fee, however, is anyhow increased to 3% from 1% .

This is stated by the civil servants’ pension fund in a press release. The new chairman Henk Brouwer can imagine that this is a disappointing development for participants in the fund.

ABP had a coverage ratio of 94% at the end of last year. Without the DNB interfering, that would have been 91%. The coverage ratio is the ratio between the invested capital and the financial obligations of a fund. DNB stroke a three month average of the calculation interest that is used to calculate the coverage ratio, instead of using the interest rate that was valid at the time. This action pushed the coverage ratios up.

With a current coverage ratio of 94% and when taking the pension fee raise into consideration, ABP is 0.5% short of reaching the demanded coverage ratio of 105% at the end of 2013. Brouwer: ‘unfortunately, we are obliged to take additional measures with this coverage’. He emphasizes that only at the end of 2012 it will become clear whether the pensions should be reduced or not.

The current coverage ratio of the ABP is only 94%, AFTER the DNB ´pimped´(i.e. artificially increased) the calculation interest and thus the coverage ratio by mediating the interest over a three month period, instead of using the actual interest (see the red text). Otherwise, it would have been a very poor 91%. That is bad.

But things are even worse at other pension funds. Again the FD:

Metal Industry Pension Fund ´PME´ announces a reduction of the pensions by 6%. The coverage ratio of the fund was 90% at the end of last year, which is below the critical threshold of 96%.

This is stated by a spokesman from PME. It is still under discussion, whether the pension fee is raised or the pension arrangement is retrenched.

Without DNB interfering, the coverage ratio would have been 87%. PME achieved a yield of 9.4% in 2011. This was not enough to get PME out of the problem zone. Chairman Frans-Willem Briët of PME: ´As a consequence of the low calculation rate, the pension obligations soared by 20% in one year. Besides that, the fund needed an additional coverage of 7%, due to the increased life expectancy.´ Based on the preliminary data, PME is short 6% of coverage.

The third pension fund in danger of lowering the pension payments is PMT, the Pension fund for Metal and Technical industry. Again the FD:

At PMT the intended reduction of the pension is between 6% and 7%. The coverage ratio at the end of December is 88.5% [percentage after DNB increased calculation interest - EL], while the critical threshold is 95%. 

Another pension funds got off with a fright. From the same FD article:

The Pension Fund for Healthcare and Personal Care got off with a fright, thanks to the DNB. The coverage ratio of the fund at the end of December was 97%. That would have been 93% without the DNB having interfered. In that case the fund should have reduced the pension payments by 1% and raised the fees by 2.5%

It´s a mess. The pension funds are in the center of a perfect storm:
·       The people get older and older, thus needing more pension payments;
·       The Euribor interest rate is about as low as ever;
·       The yields on the stock market and at the fixed income markets are poor at the moment;
·       The high-yield sovereigns (PIIGS) offer much too much risk, while the low-risk sovereigns (Germany, The Netherlands) don´t yield money at all;
·       In the meantime, the pension funds are facing a haircut on Greek debt of no less than 68%.

It is almost a miracle that the pension funds still managed to achieve decent returns, like 6%-9.5% return on investment in 2011.

So people could say: ´What is the fuzz about, if the DNB artificially raised the interest rates a tiny bit. The interest rate is indeed historically low at the moment and it will definitely rise in the future´. Then I would say to them: ´Ask the Japanese please, if this is such a definite thing to happen´. Please look at the chart:

Chart courtesy of
Click to enlarge
The Japanese interest rate has been (close to) zero since 1996 and will probably be close in years to come. At the same time, the Japanese Nikkei Index is still at only one-third of its peak performance, after almost 25 years wherein it never has been even close to its record. And Europe and the US have been following the Japanese scenario ´to a tee´ since 2008.

So it is my opinion that the DNB has gambled with the pensions of the youngsters, in order to sponsor the current pensionates.

These are the same pensionates that have mostly been retiring at the age of 55-62 years, while current youngsters are now facing a retirement age of 67-70 years. These youngsters will definitely live longer, in general, but not for the 8-15 years difference that will lie between their retirement age and the retirement age of the current retirees. 

It is not that I don´t grant the current and coming pensionates a good, steady pension, but it must remain fair towards the current youngsters.

And the worst thing that could happen to the youngsters, is that at the moment when it is finally time for these youngsters to retire, the current retirees will have emptied the piggy banks of the pension funds, leaving only this letter: ´Kindest regards, your parents … and the DNB´.


  1. Ernst, your articles are very interesting. Thank you.

  2. Thanks for the compliment. It are people like you that make it all worthwhile!