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Sfeer Pensions

One of the main challenges for Dutch plans is to earn enough return to avoid further reduction of pension rights.

No more room for traditional pension funds on both sides of the Atlantic?

In its latest Global Pension Study, MSCI said North American and Western European corporations showed the highest average ratio of underfunding in 2016. The U.K. in particular is hurting right now, with the uncertainty over negotiations that will pave the way for the country to leave the European Union.

The latest figures from the London-based Pension Protection Fund's 7800 index of DB funds show an aggregate £220.4 billion deficit for the corporate funds as of Aug. 31 2017. Data from the financial regulator De Nederlandsche Bank show the number of retirement plans in the Netherlands has fallen 62.4% to 192 over the decade ended June 30, largely due to consolidation. Corporations have been closing their DB plans to further accruals, and generally have been trying to reduce their pension exposure.

Martijn Vos was interviewed on this subject recently.

As low interest rates and growing deficits continue to blight corporate defined benefit funds, sources expect to see more plan sponsors globally freeze or otherwise alter their retirement offerings. Corporations have been closing their DB plans to further accruals, and generally have been trying to reduce their pension exposure by having more investments be liability driven. Another strategy is to transfer the risk to insurance companies by buying annuities for covered retired employees.

Reasons for decline

Martijn Vos states that Dutch plans were either closed or moved to an industry wide arrangement or a ‘general pension fund’: collective plans that may cover defined benefit, defined contribution, multiemployers and cross-border plans. According to Vos, reasons for the decline are the increasing governance burden and increasing cost, acknowledging that since Dutch pension liabilities are based on market interest rates, the “European Central Bank policy of the last years (has) had a negative impact on funding ratios." Contributions have also increased. Looking forward, one of the main challenges for Dutch plans is to earn enough return to avoid further reduction of pension rights, says Vos.

Conditional indexation

Regarding differences between Dutch and U.K.-based plans, he adds: "Compared to their Dutch counterparts, pension fund trustees in the U.K. are deprived of an important risk-mitigation instrument," i.e. conditional indexation. Under conditional indexation, increases in payments depend on the plan and the sponsor having the resources to meet these obligations. If the plan is running a deficit and the sponsor is unable to plug it, no increases would be paid. Trustees also must be satisfied that the best interests of participants would be served in the case of suspending indexation under this arrangement. Ortec Finance offers additional information on pension risk management for multinationals/corporates.