PCN not positive about pension indexation in the next few years

The Daily Herald writes that the pension fund for the public, education and health care sectors in the Caribbean Netherlands PCN has taken measures to secure its financial position as much as possible under difficult circumstances.

Due to the low funding ratio the outlook for indexation of pensions in the coming years is not positive, the fund stated in its annual report for 2014.

The total pension assets of PCN rose from US $279 million in 2013 to US $321 million in 2014. The total return on the investment portfolio was 5.9 per cent. Both the equities (four per cent) and the fixed-interest securities (6.5 per cent) contributed to the positive investment result, which also outperformed the index, PCN stated in a press release on Tuesday.

Just like all pension funds, PCN is confronted with low interest rates. The funding ratio is the indicator for the financial position of a pension fund. It represents the ratio between the assets and liabilities by means of a percentage. If the interest rate drops, the liabilities of the fund increase. The fund took into account that the interest income will be lower and therefore has to reserve more capital to be able to pay the current and future pensions of participants.

The funding ratio, which was already below the required 100 per cent with a level of 99.0 per cent in 2013, declined further to 96.8 per cent in 2014, due to the low interest rate.

In 2013, the board of the pension fund submitted a recovery plan to return to the minimum requirement of 100 per cent within three years.

In 2014, the board had taken supplementary measures to achieve the desired recovery, PCN stated. Based on a study PCN had conducted to explore the effects of the various management tools, the board decided at the end of 2014 to make changes in the investment – contribution – and indexation policies.

In the investment policy, it was decided to increase the coverage of the risk of a further decline in the interest rate. From now on, 50 per cent of the interest rate risk will be covered via long-term bonds.

The board has also decided to step up the investments in equities from 20 per cent to 35 per cent of the investment portfolio to increase the chance of a higher return.

Because of the extremely low interest rate the PCN board has decided to lower the interest rate the fund uses to calculate its liabilities to 3.15 per cent. As a result, the cost-covering contribution rate increased. The costcovering contribution rate in 2014 was 28.4 per cent. For 2015, the contribution has been set at 30 per cent of the pensionable base. With the higher contribution the board aims to support the recovery and hopes to enable indexation of the pensions in the future.

The pensions could not be adjusted to the increases in wages and consumer prices in 2014 due to the low funding ratio. PCN has decided that indexation can only be granted if the funding ratio is minimally at a level of 110 per cent. Therefore, the outlook for indexation in the next few years is not positive.

“The board will continue to closely monitor the developments with respect to the interest rate and the financial markets in 2015, and will investigate how further-management policy measures can contribute to recovery of the financial position,” PCN stated.

PCN said it had made “important steps” in 2014 to reinforce its governance structure. The Advisory Council was brought to full strength. In addition, the Advisory and Accountability body was created with representatives from the employers, participants and pensioners. All the seats on the board of the pension fund were also filled early in 2015. Consequently, all the bodies within the governance structure have been brought to full strength.

On the same subject, Dutch News reports that the Dutch central bank’s decision to change the way in which key interest rates for the pension funds in Holland are calculated will lead to an average drop in coverage ratios of 3.5%, according to calculations by pension advice group Aon Hewitt.

Dutch pension funds should have a coverage ratio of at least 105%, meaning they have €105 for every €100 they need to pay out in pensions. The giant civil service pension fund ABP has already said the change will cut its coverage ratio from 103.9% to 102% and the two big engineering funds PMT and PME report similar drops. The change makes it likely more funds will have to freeze or cut pension payouts and some may be forced into special measures by the central bank itself. Banks and pension funds say the central bank cut is ‘incomprehensible’ and ‘will hit workers and pensioners in their pockets’. ‘The central bank is forcing premiums up which goes against the strategy to boost spending power,’ said Gerard Riemen of the pension fund federation in the Telegraaf. ‘We don’t understand it at all.’