Lower actuarial interest rate has negative effect on fund

With effect from 15 July 2015, the Dutch Central Bank (DNB) has implemented a new method to determine the actuarial interest rate that is used to calculate the value of pension funds’ commitments. DNB claims the new method is more realistic, as it is more aligned to the actual development of the interest rate. Under the new calculation method, NN CDC Pensioenfonds’ funding ratio on 15 July 2015 is 8.1% lower than it would have been under the old method. The fund may have to submit a recovery plan to DNB later this year.

Pension funds are required to calculate their commitments based on the total amount the fund will need to pay out all pensions promised to pensioners on their respective dates of retirement. DNB requires pension funds to apply the Ultimate Forward Rate method (UFR) when making their calculations. The UFR is a part of the actuarial interest rate that pension funds use to calculate the value of their future commitments.

New method

In 2012, DNB fixed the long-term UFR at 4.2%. This fixed rate is now being set aside. From now on, the UFR will be calculated each month based on the long-term forecasts derived from the market over the preceding 120 months. The new method resulted in a UFR of 3.3% on 15 July 2015. This rate is expected to drop over the next few months, in line with the decline in market interest rates that has been ongoing in the past ten years.

Impact on the funding ratio

The lower actuarial interest rate has a large impact on NN CDC Pensioenfonds’ funding ratio. The funding ratio reflects the ratio between a pension funds’ assets (the value of its investments in equity, bonds, property, etc.) and its pension commitments (the total value of pensions payable now and in the future). The lower the interest rate, the more assets the fund will need in order to be able to pay out its future pension commitments.

NN CDC Pensioenfonds is being particularly hard hit by the lower actuarial interest rate, as it is a new fund with few current pensioners on the one hand and a high level of long-term pension commitments on the other. This makes the fund more sensitive to changes in the actuarial interest rate prescribed by DNB. Based on the new method, NN CDC Pensioenfonds’ funding ratio on 15 July 2015 amounts to 113%, which is 8.1% lower than the funding ratio would have been on that date under the old method.

Impact on policy funding ratio

The lower actuarial interest rate also has an impact on the fund’s policy funding ratio, which is the average of the funding ratios for the preceding twelve months. The fund takes its policy funding ratio as a reference for its policy decisions, such as determining the headroom available for indexation or the adequacy of the fund’s reserves. By taking the twelve-month average as a reference, important decisions do not hinge on the funding ratio for any one date. Disregarding other effects, the new method will cause the policy funding ratio to decline by 0.7% per month over the next twelve months.

Recovery plan

In keeping with legal requirements, the fund may have to submit a recovery plan to DNB before the end of this year. In its recovery plan, the fund will need to describe how its policy funding ratio will reach or surpass the required level of capital by the end of the ten-year period ahead. The plan will be updated each year.

More information

If you wish to follow the news on the impact of the lower actuarial interest rate, read the news items on the website and the digital newsletters published by the fund. If you have any specific questions, you can contact the Pension Desk at 088 - 1162 421 or pensioenloket@nn.cdcpensioen.nl.