Oct. 20 (Bloomberg) -- Stichting Pensioenfonds ABP, the biggest Dutch retirement fund, said it may cut pension payouts for the first time since 1984 as lower interest rates push pension funds’ capital buffers below regulatory thresholds.
ABP and Pensioenfonds Zorg en Welzijn, which together manage 338 billion euros ($464 billion), both said today that their obligations exceed their assets in the wake of Europe’s debt crisis, while the state-mandated interest rate used to calculate their payout requirements fell.
ABP, one of the world’s three biggest pension funds, said its coverage ratio, or assets relative to future benefit payments, fell to 90 percent at the end of September from 112 percent at the end of June. PFZW’s ratio declined to 91 percent from 110 percent. Dutch pension funds aren’t allowed to raise payouts when the ratio falls below 105 percent, and may need to raise premiums to recover.
“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,” Peter Borgdorff, managing director of Zeist, Netherlands-based PFZW, said in a statement. It won’t be possible to increase pensions next year, he said.
The weak outlook for the global economy means central banks may be a long way from tightening monetary policy. Low interest rates have “serious consequences for the financial position of Dutch pension funds,” Borgdorff said.
First Since 1984
“As long as European leaders shirk their responsibility for arriving at a definitive answer to the European debt crisis, it will not be possible for Dutch pension funds to start showing sufficient recovery,” he said.
ABP vice-chairman Joop van Lunteren also said a pension cut is getting closer unless the coverage ratio rapidly improves. That would be the first reduction for ABP since 1984, when payouts for government workers were reduced by 3 percent in line with a wage cut, Jos van Dijk, a spokeswoman for the Heerlen- based fund, said today.
ABP said it will announce any further steps in the new year, based on the situation as of Dec. 31.
Dutch pension funds are obliged to calculate their obligations on the basis of an interest-rate term structure defined by the Dutch central bank. A 1-percentage-point drop in that rate pushes down the coverage ratio by 16 or 17 percentage points, according to ABP’s Van Dijk.
Funds have asked the Dutch government to reconsider the system to make them less dependent on daily interest-rate moves.
ABP’s obligations increased by 43 billion euros in the third quarter as the rate used declined by 1 percentage point. PFZW said a 1.1 percentage-point drop in the 30-year swap rate in Europe to 2.7 percent hurt its coverage ratio by about 20 percentage points.
ABP’s assets declined by 2.9 percent to 235 billion euros in the third quarter, mainly as a result of losses on equity investments. PFZW’s investments rose 0.6 percent to 103 billion euros in the same period.
About 5.5 million Dutch workers with pension savings participate in one of the country’s pension funds, which had total assets of 750 billion euros at the end of the second quarter, according to the nation’s central bank.
--Editors: Keith Campbell, Jon Menon.
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