Many pension funds are going through hard times financially. The capital coverage ratio, which is a measure for the financial position of pension funds, dropped below 100% for the largest Dutch pension funds.
According to recently made calculations, the capital coverage ratio of ‘Stichting Pensioenfonds Caribisch Nederland’ (PCN) is well above 105%. The legal minimum capital coverage ratio for PCN is 100%.
The past few months are filled with insecurity in the financial markets, created mainly by the debt problems in the euro zone. The approach of the problems in Greece created much unrest, causing a substantial decline in both interest rates and stock prices. Both these effects caused a decrease in the capital coverage ratios. Pension funds have to prepare for measures if the capital coverage ratios remain at such low levels until the end of the year.
It is expected that many pension funds will not be able to grant indexation so that the purchasing power of pensions will decline and employers will have to pay additional contributions.
Some pension funds are already discussing the need to inform their participants of the possibility to reduce the pensions.
PCN is currently in calmer waters. The pension fund has existed for over a year now and when it was created the board opted for a sound and conservative investment policy. Most of the investments are made in relatively ‘safe’ government and corporate bonds. In addition, a small part of the portfolio is invested in shares with a limited risk profile. The currency risk is largely covered. Currently PCN is investigating possibilities to further improve the risk and return profile of the investments. PCN is fully confident that its capital coverage still has upward potential and will remain above the legally required minimum.