Dutch pension funds need to cut pensions in 2021 based on current rules – If the policy funding ratio is below 90% at the end of this year, then Dutch pension funds need to cut pensions in 2021 based on the exemption rule. The graph below shows the policy funding ratio as well as the minimum required coverage ratio for all pension funds in the Netherlands. Multiple pension funds including the largest pension fund in the Netherlands ABP, which has a policy coverage ratio of 89.7% at the end of the second quarter, are in the danger zone and would need to cut pensions in 2021 based on current figures. In total these funds have roughly EUR 500bn assets under management.
We judge that the Dutch government will opt for a general pardon to prevent any cuts – The Dutch cabinet might approve a general pardon which prevents pension cuts in 2021, regardless of the policy funding ratio at year-end. We judge that the Dutch government will approve this before Christmas for mainly two reasons. Firstly, the negotiations around the new pension system are still ongoing. Secondly, we have upcoming elections in March 2021. Hence, there is a lot of pressure for political parties to prevent any pension cuts. Indeed, the political parties PVDA and Groenlinks are proposing a general pardon to prevent pension cuts in 2021. Up until now, their position has not been linked to the new pension system. However, this might change as the new pension system still needs to be approved by the first chamber and if PVDA and Groenlinks do not approve the new pension system, then it will not pass.
The market impact is expected to be limited, but it will set the scene for the future– We judge that the market impact will be limited. If Dutch pension funds don’t need to cut pensions, then the coverage ratio will remain the same as well as their interest rate hedge ratio, which is our base case. Hence, there is no reason for Dutch pension funds to rebalance their interest rate hedges if they don’t have to cut pensions. In case, Dutch pension funds need to cut, then the coverage ratio will increase as well as the hedge ratio. A few Dutch pension funds, which are the minority, would decrease their hedge ratio in this case. However, pension funds which are in the danger zone also have on average a low hedge ratio. Consequently, we don’t expect that these funds will lower their hedge ratio. Hence, in both cases we expect limited rebalancing on the back of whether Dutch pension funds need to cut pensions in 2021. Nonetheless, there might be other reasons why Dutch pension funds would need to rebalance, which we will discuss in our upcoming Outlook for Dutch pension funds.
Overall, it is remarkable that the coverage ratio, which will disappear in the new pension system, already seems to become less important for whether Dutch pension funds need to cut pensions in the current system. We expect that this trend will continue and judge that the transition regime which holds for the period 2022-2025 will give more clarity about this. (Jolien van den Ende)