Falling interest rates pummel funding ratios at PFZW, ABP

NETHERLANDS – Dropping interest rates knocked the coverage ratio for Pensioenfonds Zorg & Welzijn (PFZW) down to 91% and Stichting Pensioenfonds ABP’s down to 90%.

Officials at both warned pension payments could be frozen or reduced if the economic situation continues to deteriorate.

In its third quarter results released today, the €103bn ($142bn) PFZW said its funding ratio dropped to 91%, down from 110% in the previous quarter. The movement was a result of a decrease in interest rates and dropping markets in the last two months of the quarter.

The 30-year swap rate in Europe declined to 2.72% from 2.8% the previous quarter.

Peter Borgdorff, managing director, said: "Let us make one thing clear: the situation concerning the coverage ratio is not good. The stock markets have been depressed in the past few months, and interest rates have also fallen sharply. This unfortunate combination -which impact all pension funds- led to a rapid decline in the coverage ratio in the past quarter."

"In view of the current financial position, it will not be possible to increase pensions next year. And unless there is a major improvement in the situation before the end of the year, it may mean in the worst case that current and accrued pensions will have to be reduced."

Any decision to not increase pensions in line with wage will go into effect in April 2013. If so, that will mark the third year pensions are froze, said spokesman Bram van Els.

The fund's investments returned a nearly flat 0.6% in the third quarter.

It allocates 61.5% to a return asset portfolio which includes liquid equities, real estate, infrastructure, high-yield bonds and other "risk-return sources". PFZW also allocates 33.9% to interest rate and inflation risk strategies and 6.2% to commodities.

Meanwhile, ABP said its coverage ratio fell to 90% from 112% the previous quarter, primarily because of the decline in interest rates.

Officials blasted the regulatory environment that links the health of pensions to current interest rates.

Vice-chair Xander den Uyl said: "In order to be able to index-link the pensions, the coverage ratio must be at least 105%. The chances are that we will not be able to close the gap between 90 and 105% in the space of one month. We will have to look at whether, under the terms of the recovery plan, the need exists to levy extra premiums. Moreover, if ABP's coverage ratio is still below the recovery path level at the end of December, the Board of Trustees will need to consider whether further measures are required. The ABP Board of Trustees is calling on the politicians to take a serious look again at the system that makes us so dependent upon the current interest rates."

ABP allocates 41.6% of its €235bn in assets to fixed income, 51.3% to real assets, 6.7% combined to hedge funds and tactical asset allocation strategies and 0.4% to overlay strategies. It returned -2.9% in the third quarter.