The persistent low long-term interest rate – the criterion for discounting liabilities in the Netherlands – is putting the coverage ratios of Dutch pension funds under pressure. If interest rates do not rise, or equity markets fail to improve soon, widespread cuts to pension rights are inevitable next year.
Such a scenario is the opposite of what the Dutch cabinet intended with January 2015’s new financial assessment framework (nFTK). Under this, schemes short of the required 125% funding level must submit a recovery plan annually mapping out how they will improve their coverage within 10 years.
If they are unable to recover within this period, they must reduce pension rights to such a level that they can improve. If their funding remains short of the minimum required coverage of 105% for five consecutive years, and the sponsor does not fill the funding gap, they also have to cut.
When the nFTK came into force, the coverage ratio of Dutch pension funds was on average 108%. At the time, rights reductions looked unlikely. Now, thanks to the historically low interest rates, funding has plummeted to an average of 94% by the first week of July 2106.