Onno Steenbeek, Professor of Pension Fund Risk Management at Erasmus School of Economics, is one of six specialists appointed member of the Parameter Committee by the Dutch Ministry of Social Affairs and Employment. The Committee is led by former Minister of Finance and former chairman of the Euro Group, Jeroen Dijsselbloem. The advice from the Committee can have a major impact on the premiums, recovery plans and the probability of pension cuts by Dutch pension funds.
Every five years, a committee examines which maximum return expectations pension funds may use as a basis for calculating their premiums and how the actuarial rate of interest they use for their coverage ratio is composed. Steenbeek was a member of this committee in 2014 as well. This time, the Committee sets to work under rather sensitive circumstances: the discussion about the pension system has become heated, due to the threat of pension cuts. In the past week, the pension funds in the metal industry (PME and PMT) sounded the tocsin: they estimate there is a 70% to 80% chance that they have to cut the pensions of their two million participants next year.
The pension sector expects that the Committee will say the pension funds will have to reckon with lower returns on investment than in the past. After all, investors worldwide are having greater difficulty finding lucrative investments. The result could be that the pension premiums will have to go up or that the pensions will have to go down.
Additionally, the Committee will provide advice on one aspect of the actuarial rate of interest of pension funds, in particular on the rate used for very long horizons. This will have limited impact on coverage ratios, as the basis for valuation of liabilities will remain a risk free interest rate. It is suggested that the Netherlands is too careful, so that pension funds have too gloomy a view of their own financial situation. The Dutch funds calculate what capital they need to be able to pay the promised pensions, as well as the market rate of interest. The ratio between this amount and the capital a pension fund actually has, is the coverage ratio.
On horizons of twenty years and longer, pension funds incorporate a so-called 'ultimate forward rate' (UFR), which in practice stabilizes interest rates for long maturities. This is necessary, as there are no reliable market prices for these horizons as governments hardly issue bonds with maturities of 20, 30 or 50 years.