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Rising interest rates lead to strong recovery of Dutch pension funds

Rising interest rates lead to strong recovery of Dutch pension funds
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ARTICLE TYPE
Research
TOPIC
Solutions
PUBLISHED
March 18,2021
READ TIME
6 mins
AUTHOR
David van Bragt
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Back
ARTICLE TYPE Research
TOPIC Solutions
PUBLISHED March 18,2021
READ TIME 6 mins read
AUTHOR David van Bragt
SHARE

Funding ratios of Dutch pension funds have recovered strongly in 2021, due to rising interest rates and positive developments of the equity markets. In this article we give more information about the funding ratio development of an average Dutch pension fund by providing an overview of the development of the actual and (12-month) moving average funding ratio. In addition, we make a projection of the funding ratio as of March 12, based on the latest market developments. An overview is also given of the most important market movements (up till now) in 2021.

 

Figure 1 shows the funding ratio development during the last year, including an estimated funding ratio at March 12. We here consider an average Dutch pension fund, based on statistics published by DNB.

 

Funding-ration-average-Dutch-PF.png

Figure 1. Sources: DNB, Bloomberg, Aegon Asset Management as at March 12, 2021.

 

We estimate that the actual funding ratio has increased with 6.3%-point due to market movements in 2021, to end at 106.6% at March 12. The 12-month average funding ratio is projected to increase with 2.0%-point to 97.0%.

 

Figure 2 shows the estimated change in the current funding ratio in 2021 (up to March 12).

 

Funding-ration-change-2020-2021.png

Figure 2. Sources: DNB, Bloomberg, Aegon Asset Management as at March 12, 2021.

 

This breakdown shows that equity markets moved upward in 2021, leading to a funding ratio increase of 1.3%-point. Market interest rates increased with circa 0.45%-point. This resulted in a significant increase of the funding ratio due to lower liabilities (6.8%-point). This positive effect was partially offset by the negative effect of the increasing interest rates on the fixed income (-0.9%-point) and interest rate swap portfolios (-2.1%-point).

 

The change of the market curve and UFR curve is shown in the figures below.

 

Market-curve-change-2020-2021.png

Figure 3. Sources: Bloomberg, Aegon Asset Management as at March 12, 2021.

 

UFR-curve-change-2020-2021.png

Figure 4. Sources: Bloomberg, Aegon Asset Management as at March 12, 2021.

 

Figure 3 shows that the market curve for long maturities has shifted almost parallel. This effect occurs to a lesser extent for the UFR curve, with which the liabilities are discounted, see Figure 4. This is caused by the extrapolation technique used for this curve and results in a lower interest rate sensitivity of the liabilities. This effect is reinforced by the adjustment of the UFR methodology as of January 1, 2021. The rise in market interest rates in the past period is therefore not translated one-on-one into lower liabilities.

 

Finally, Figure 5 shows the development of the equity markets in 2021 (again, up to March 12).

 

Development-equity-indices.png

Figure 5. Sources: Bloomberg, Aegon Asset Management as at March 12, 2021. N.B. All indices have been rebased to 100% at December 31, 2020.

 

This figure shows that equities (both equities world and emerging markets) have delivered a return of approximately 4% in 2021 up to March 12. For listed real estate, the return has been higher so far (+ 9%). So far, all these categories have thus contributed to the increase in the funding ratio.

 

Conclusions

We expect the current funding ratio for the average Dutch pension fund to have risen by 6.3%-points so far in 2021 due to market movements, ending at 106.6% as of March 12. Our estimate is that the 12-month average funding ratio in this period rose by 2.0%-points to 97.0% as of 12 March. The main reason for this significant recovery is the rise in market interest rates in recent months. Positive developments in the equity markets also contributed to the recovery.

Aegon AM Dekkingsgraadscan pensioenfondsen (Dutch).pdf

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More about the authors

David van Bragt Senior Investment Solutions Consultant

David van Bragt, PhD, is a consultant investment solutions in the fixed income, LDI and investment solutions team.

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